How to Build Wealth Using Other People’s Money
It takes money to make money. However, it doesn’t necessarily need to be your money if you know how to leverage other people’s money to help you invest in yourself and build your net worth.
Although living below your means is a good start toward building a financial cushion, ditching your latte habit and cable subscription won’t add you to the list of self-made millionaires. Instead, using other people’s money, aka OPM, can help you get ahead financially, even if you want to start investing with little money.
10 Best Ways to Build Wealth Using Other People’s Money
As you learn how to build wealth fast, consider leveraging other people’s money to help you grow your net worth. Although you shouldn’t expect to use other people’s money for free, you can increase your returns. Here are 10 ways to build wealth using other people’s money:
1. Buy a House
Few people these days pay cash when they’re buying a house. Instead, most people take out a mortgage for a large portion of the purchase price and pay off the loan via monthly interest and principal payments. Not only are you no longer paying rent each month, but you’re also making an investment usually several times larger than your down payment.
For example, if you put down 20 percent on your home, you’re borrowing four times as much to complete the transaction. That means that if your home value goes up by 1 percent, your real return on your down payment is closer to 5 percent. Be careful, however, because any losses are also magnified.
2. Small Business Loans From the SBA
Starting a business can be a great way to build your wealth, but it can be challenging if you don’t have money saved up already or a rich family member to back you. The Small Business Administration offers loan programs under which the government works with banks to get your loan approved for anywhere from $500 to $5.5 million and guarantees — as long as you are eligible — that the loan will be repaid if you default.
An SBA loan can offer better terms than other loan options. SBA loans can include competitive interest rates, lower down payments and no collateral requirements.
3. Rental Real Estate
Another wealth-building strategy, investing money in rental real estate lets you leverage your investment in the same way you leverage your down payment on a home. When you put down 20 percent or less, you can pay off the rest of the loan with money from tenants who rent your properties. And you get to keep the profits.
Additionally, all of the interest you pay on the rental property loan is tax deductible, as are other costs like depreciation, repairs or advertising your rental. Your rental real estate can give you multiple streams of income and continue your day job. Just remember to put money aside for home repairs, because, as the landlord, you’re now responsible for covering home maintenance and repairs for your tenants.
Depending on your mortgage interest rate, you could make more money by investing extra cash rather than paying down your mortgage. Even if you could pay off the mortgage early, you can essentially use the bank’s money to invest and continue making your regularly scheduled mortgage payments.
With this strategy, you get to pocket the difference between the interest rate on the mortgage and your investment returns. For example, if you have a mortgage with a 3.5 percent fixed rate, but market conditions have changed and you could earn 6 percent in the stock market, you can make 2.5 percent by using the bank’s money.
5. Margin Loans
When you have assets invested in the stock market, you might be able to leverage those assets into additional loans that you can use to invest further. For example, if you have a $9,000 stock portfolio, your brokerage might lend you another $4,000, using your current investments as collateral.
You’ll owe interest on the amount you borrow, but that interest rate is often less than you would owe on a credit card or other types of unsecured debt, and any return you make in excess of the interest rate is yours to keep. Margin lending is high-risk, however, because the value of your investments could fall at any time and result in a loss.
6. Silent Partners
Not everyone who invests in a business brings the same skills or assets to the table. In fact, in some businesses, some partners simply bring the capital to the table and let others invest their time and expertise to make sure the business makes money.
When you have a brilliant idea but lack cash to bring it to fruition, you might be able to convince someone else to act as a silent partner in the business. The silent partner supplies the money to get the business going, you put in the sweat equity to make it run — and you both share the profits.
7. 401k Matching
The rule of “paying yourself first” applies to retirement savings as well. When your employer offers a 401k plan, make sure you take advantage of any matching contribution the company offers to boost your plan balance.
Otherwise, you’re turning down free money that other people are giving to you — not loaning to you — to save for your retirement. For example, an employer might offer to match your contributions up to a certain percentage of your salary. Plus, all of the contributions grow tax-free in the 401k plan until retirement.
8. Angel Investors
When you need to scale your business to the next level, an angel investor might be able to help. An angel investor invests money in exchange for an equity stake in the business and might also be willing to provide expertise and business knowledge to help you grow your business. As your business grows, if you need more cash, you might reach a point where venture capitalists are also willing to invest in your company.
Out of the various fundraising-via-internet opportunities, crowdfunding has emerged, which is when entrepreneurs reach out digitally to the masses to back their business idea. You can engage in rewards-based crowdfunding by promising a future reward, such as a future product or service.
For example, you could pitch a new product idea that — once you perfect your prototype — will be the best option out there. Then, offer to send everyone who “invests” at least $150 a gift, like one of the first models from your yet-to-be-completed assembly line.
10. Small Business Innovation Research Program
You might be able to get funding through the Small Business Innovation Research program, which is overseen by the U.S. Small Business Administration if you have a business focused on research and innovation that could be commercialized for government use. You can submit your ideas to multiple government agencies and receive funding for both a concept development stage and a prototype development stage. Companies that have benefited from the program in the past include 23andMe, iRobot, Symantec and Qualcomm.