Okay, let’s have a look at how people can leverage their money (or someone else’s money) to get that money out to work for them so they can have a thriving business and financial success and freedom.
Let us start from several maxims that we have already learned about.
Poor people work for money, but rich people get money to work for them.
How much nicer to have staff (money) working for you.
All projects should be framed in equations that subscribe to basic mathematical rules, namely that any idea should be designed to make money. In other words, you need a working equation that produces a profit, otherwise you are working to lose money which is an idiotic way to set up a business.
What the above requirement entails is that you start any business thinking from the end result and work backwards, NOT the other way round.
This means, you first need to clearly understand what you are seeking to do; where do you want to end up. That’s your start point.
Secondly you need to be clear how you are intending to get there, and you need to know how any idea is to be funded. This in turn needs to take into account where the money for the project comes from, how it is to be paid back, and finally, how you propose to make money in the process rather than lose money.
Now let’s look at the normal way of dealing with the purchase of real estate.
The average person starts at the present and works forward from there which is bloody silly. I need a home, therefore I will look around for something ideal or close to ideal, then I will borrow the necessary cash and put down a deposit and spend most of the rest of my life paying for it.
That way lies a hard road. Let’s see what’s wrong with it and how we could improve it.
First mistake: You are paying for it instead of getting someone else to pay for it.
The first thing you need to do is work out a way to cover the necessary requirements listed above. Let’s start by taking a simple example.
You need a house to live in. Not just any old house, but something nice that you will enjoy inhabiting.
The average person will wander around, choose something they can afford and that will just about do, and then they will sort out a mortgage and pretend to buy it. What they are in effect doing is changing their landlord. Instead of paying rent, they now pay the bank, which really owns the house for the next thirty years.
That’s great, if that turns you on, but it is not really ideal. You spend your life buying the house so that you finally own it when you no longer need it. Sounds daft to me. It sounded daft to me when I was a kid and took on my first failed deal.
Let me show you what I did.
I had been listening to one of my mother’s friends, Sir John Templeton, and I knew how rich people did things. I wanted to be rich so I paid attention and took his advice. Father was poor, so I didn’t take his advice. His friends were even poorer so I didn’t even bother to listen to them.
My first deal didn’t come off, but it would have been my best, but when I got married we moved into a ruin and slummed it for a couple of years.
I was adamant that I would not start out strangled with loans. I knew that Einstein used to claim that compound interest was the eighth wonder of the world. I wanted that system working for me. Maybe that was another of my maxims. I want compound interest on my side.
Think about it: If you are paying off a mortgage you are forking out compound interest maybe for thirty years. I want the interest being paid to me. That’s a much better arrangement.
The question was: how to arrange that.
I needed two important things to coincide. I needed a cheap house, and I needed to get money on my side instanter.
The cheap house came reasonably easily. It was a ruin, had no mod cons, and not even a bathroom. It was unmortgageable, and so I had to borrow a small amount of money from the bank over the course of two years, and I had to work evenings and weekends to do the renovation work myself.
That was part one, and life was tough, but only a small period of my life was really tough. But now I own a house. It isn’t what I want or what we are going to need, but it’s a proper habitable house and I own it. The most important issue is that I can now use this house to get some mortgage finance.
Part two had me buying an expensive car with a bank loan, only I didn’t use the money to buy the car. I also got several credit cards and bundled all the cash together and bought a crummy semi-detached house. Again, please note this second property was not mortgaged, only the first property is. I could now buy a better class house which I tarted up over the course of two months and rented it out. I can now keep going for as long as I like. I have an open-ended finance deal, all because I started matters in the correct manner. By all means borrow money, but make sure that you are entering an open ended situation.
I hope you see what is happening here. I have reversed the way most people do things. Those of you who have followed me over time will know I use what I like to call the Backwards Principle. I’ll explain it in more detail next week, but it works. Instead of borrowing money to gradually pay it back. I prefer to start with something which I can create with my own effort, and then use that to get money to do the next deal.
It’s all part of that essential pre-requisite: every deal goes much better if you reverse your approach from the common folks’ method. And it goes really well when it’s based upon a formula that ends in a positive number.
See you next week when I will explain all of this in more detail, with some real numbers to prove it works. See you then.
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