5 Steps to Making Money with OPM

hey guys it's ken so i get lots of requests for lots of videos and i'm excited to do this one these are the five steps to making millions of dollars tax-free with other people's money this is exactly how i did it for 30 years experience if you want to hear more stay tuned hey guys there's going to be a lot of information in this video so to make it easier on you we summarize them into show notes just click the link below in the description to grab all of them also as always don't forget to like subscribe and hit the notification bell so you don't miss any of my future videos and finally if you want to help support the channel i have an amazing master course that will help you kick start your investing journey you can get fifty dollars off the course if you use the promo code master 50. it would mean the world to me if you took a look at it so step number one in order for you to be wealthy you have to understand the patterns of the rich why try to recreate the wheel when you can go back and look at what so many people before us have done one of the things you can study are the patterns of the rich and so i've done that for you i've broken it down into three things that i think are really important that you really need to understand if you're going to use your money or someone else's money in order to become wealthy the very first thing is you need to understand the types of income so there's portfolio there's passive and there's earned income and we're going to talk a little bit about that in a minute the second one is how this cash flow works now a lot of you know what cash flow is and you casually use the words but i'm going to show you specifically how to follow cash flow how cash flow works and the third one is how to use debt and equity properly debt and equity is actually set up for you it wants you to use it and i'm going to walk you through some of the best strategies on how to use debt and equity once you understand that these are the patterns of the rich and you can figure these out you'll be on your way so let's start with the first one there are basically three types of income there's earned income there's passive income and there's portfolio income and they're very very different so the earned income is exactly what you would think this is a job so this is going to work getting a w-2 getting a paycheck putting into the bank and then going to work this is basically a nine-to-five job paid for time nothing wrong with that the majority of the people in the world fall into this category learn what the wealthy do they move over into the next two categories here which is passive income and portfolio income very very different the next type of income is passive income and of course we talk a lot about this guys this is all cash flow this is money where you invest and then your tenants pay you back through cash flow this is passive income it can also happen through a business let's say you've got a sandwich shop and you've got people buying your sandwiches and you've got the passive income okay and then there's portfolio income which is what a lot of people do i would say most people invest in stocks and funds and they hope for the dividends and this is this gets also a type of income so another way to think about it let's say let's say we're talking about mcdonald's so on an earned income that might be somebody who works at mcdonald's on a passive income that might be the person that actually owns the mcdonald's let's say let's say they own the actual franchise and they're generating passive income from that franchise and the earned income are the people that work inside of there on the portfolio income that might be a mcdonald's share you might have a share of mcdonald's let's say in the stock market so they're very very different all with the exact same company so now we're going to talk about cash flow and where does it go and so most people of course work and they get their paychecks and they got to figure out what they're going to do with it so the rich what they do is they invest and then they spend and what the poor do or and the middle class is that they spend and then they invest it's a very different strategy so what most people do is they work their job and they get their salary and then they take their income and they buy liabilities and liabilities typically depreciate they buy things like cars and boats and they run up their credit cards and then they rely on their job and their income to pay those things off and they have of course car payments and tax payments and things like that this is the pattern of the poor and the middle class so now let's talk about the cash flow habits of the rich because i think this is very different than the cash flow habits of the poor and the middle class so what happens is the rich obviously have portfolio income passive income and earned income so there's a lot of very wealthy people that make a lot of money in a w-2 or a job and so what they do however is they take their income and they buy assets here and they use liabilities to do it and then the cash flow go back into the income category so they're buying assets that are actually appreciating and they're buying assets that produce cash flow and so this cash flow just continues to pour into this income category so that they're not relying completely on let's say their earned income in other words they're generating more passive cash flow and that's the whole difference in the model between the poor and the middle class and the rich the rich primarily are investing in cash flowing appreciating assets and letting other people pay them off which is in turn generating more cash flow and it gets them richer and richer over time and then the third pattern of the rich is how they see debt now for a lot of people debt is a bad word and for me it's a good word now there is good debt and there's bad debt and of course bad debt are things like credit card debt cash advances vehicles in many many cases consumer debt payday loans these are great examples of bad debt and so you need to understand the difference over here you're going to pay high interest rates over here you're going to pay a lot lower interest rates over here you're going to have to pay them off yourself and over here in a lot of cases you're going to have somebody else pay them off so that's the difference between good debt and bad debt on the good debt side these are mortgages that could be used for rentals as an example if you put a renter in there then the renter pays down your mortgage i put education on the side of good debt because i do believe that it could pay off for you over time business ownership real estate investing those are all things that you could be using debt for now let's talk about debt for a second debt is really other people's money when you guys take your checks or your money and you go to the banks then that money becomes a liability to the bank the bank has to pay you interest on that so the way the bank makes money is by lending it out so that's in the form of good debt they also lend it out in the bad debt category so it's just money being classified in different ways so how you use debt and how you see debt is going to make a big difference in how you become wealthy the second step how the rich look at these two things cash flow versus capital gains for a lot of you cash flow means exactly that cash flow is the net income from a business or from real estate whereas a capital gain is like buying something and selling it for hire they're very different strategies cash flow tends to be a little more longer term capital gains tends to be a little more short term cash flow in a lot of cases has better tax situations and capital gains a lot of times has a higher tax liability so let's take a look at some of the differences between cash flow and capital gains on a cash flow we focus on income generation it's usually monthly or quarterly income may be taxable not always as we've talked about and cash flows in to pay the expenses in other words the cash comes in monthly or quarterly and it pays the operational expenses that's what we have on our real estate that's what i have on my management company this these are strategies that the wealthy use to live they're much more predictable although some people don't think that they are i'm telling you they are in other words all we got to do is manage our tenants and over here on the capital gains side you know how do you manage bitcoin how do you manage stocks uh you guys know the difference there so these are typically more predictable on the capital gains side you're usually focused on increasing the value of some kind of asset that you're involved in you might have higher taxes over here and the gains usually stay in the account in other words you're not really cash flowing on this side of the equation and these strategies are typical for employed investors the way i like to talk about this is with dairy cows now obviously you guys all know what a dairy cow is so there's two philosophies when it comes to a farmer there's one farmer that buys a dairy cow and waits for the beef to go up and then sells the cow and then of course that's a capital gain strategy you buy the cow you fatten it up you grow it and then you sell it whereas the dairy farmer is very different that's more like a cash flow strategy that's keeping the same cow for years and milking the cow and producing milk over a long period of time those are very different philosophies those are very different farming strategies but that's the difference between capital gains and cash flow the third big thing is that you guys need to be able to create value for the person that you are asking in other words when you're asking for money or you're trying to borrow money or you're trying to borrow equity or you're trying to build a business or whatever it is you have to bring value if you're trying to get a job you have to bring value if you create value for the other person then you're going to have a much higher success so let me give you a couple examples number one create value for others and then participate in that value so in other words whatever you create why not just take a piece of what you create i have lots of friends that have done this with companies in other words they buy companies let's say for a million bucks or 10 million bucks and their revenues are whatever they are and they participate in the value that they create be above that in other words the owner of the business is happy because they're making up to that point and the new buyer is really happy because they get some of the overage and they just work on a percentage of a split this is exactly how businesses and real estate are sold every single day number two increase the assets cash flow now we talk a lot about this in our videos but how can you as an operator increase the cash flow of the asset if you do this then you're creating value for that asset and for the money and for the debt and for yourself i'm going to talk to you a little bit about this but this is income minus expenses equals the noi minus the debt equals cash flow if you can figure out one of these areas to either increase the income lower the expenses to increase the noi or potentially even lower the debt then you can increase the cash flow just keep in mind guys that people lenders they invest in cash flow they're always taking a look if i give you money what's my return going to be so if you guys focus on cash flow and creating value for that investor or the person that you're going into partnership with then you of course will participate in the bigger picture so let me give you an example let's say you have a fourplex and it's 400 grand and you don't have the hundred thousand dollars down and you know that these rents are low in other words these are let's say 4 times 2k a month equals 8 000 as an example and you know that you can grow that to 10. so that's a deal that an investor might be happy with but you don't have the 400k and you don't have the 100k so you go to an investor and you say i don't have the 100k but i have the deal so you sit down with the investor and you show them that you can grow the rents to say ten thousand dollars in other words each unit is now twenty five hundred dollars each so you've been able to grow the rents to ten thousand dollars your expenses are going to stay the same and you're now going to have five thousand dollars in net operating income so you what you've done is you've done that by growing the rent you can also do that by lowering the expenses as an example there are plenty of things that you can do inside on the utilities on the insurance on the property tax appeals etcetera to be able to lower the expenses as well but for this purposes let's just say that you saw a value value-add opportunity of 500 a unit and you were able to grow the income by two thousand dollars a month okay so your debt is going to stay about the same and uh we'll keep that at at fifteen hundred so now your cash flow is thirty five hundred so under the first scenario it's a pretty good deal there's about eighteen thousand dollars of cash flow against a hundred thousand dollar investment so this is about eighteen percent cash on cash return now you're gonna have some vacancy this isn't perfect your debt might be a little higher your expenses might be a little higher a little lower but you kind of get the point but now what you're doing is you're showing them a two thousand dollar value ad and so now you're going from eighteen thousand to forty two thousand so what you've done is you've more than doubled your cash flow so you should be able to participate in this over here what you've done is you've used somebody else's money you've taken the property you've grown the income through hard work and through things that you've been able to see and you've grown the cash flow so now you're participating in the forty 42 000 a year so this is a great example of a value add and these happen every single day so now let's take a look at using opm or other people's money this is a very important piece so a lot of people don't understand the power of this the power of leverage the power of using other people's money i believe that you're lazy if you use your own money i used to do this when i first started obviously you save as much as you can you invest it all and then soon you're out of cash the second piece is you got to understand why people lend people lend money because people park money in things like banks they park money in things like pensions they park money in things like insurance policies in order for those things to be able to generate some kind of return they have to lend it out and that's why as a real estate investor i get money from banks i get money from insurance companies i get money from pensions that's why they lend so there's no better time than right now guys to do this because there's all kinds of money going into savings and looking for a home and these banks these insurance companies these pensions are looking to invest and they're looking for for deal makers just like you so what they're going to do is they're going to give it to you in the form of leverage and so the debt let's say might cost you let's say three percent and the equity might cost you let's say seven percent but if you can get three percent at least say seventy percent of the deal and only have the remaining part then your blended cost of capital is going to be really really really low and so the whole point here though is to find the deal and then go out and find the debt and the equity you do not have to have your own money to do this the lazy use their own money you don't have to do that the world revolves around this kind of a system the world revolves around a financial system just like this most of the people hand their money over to other people and what they do is they look for good people like yourself to be able to take that and invest it in good deals so that you make them money and you make yourself money so let me give you a real example of a property that we did so we found this property and it was a property that was for sale for 19 million dollars it was 265 units sitting in a beautiful area of arizona and we went to the bank we said how much do you think that you're going to be able to give us in the form of debt and the property at the time had about a seven hundred thousand dollar noi which of course is income minus expenses and so the bank said based on a seven hundred thousand dollar noi we think we can give you a debt of about 15 million dollars and of course what's the difference between 19 and 15 it's four million dollars so at this point we had to find four million dollars of equity and of course we didn't have all that money we had some money but we were going to have to go out and syndicate that money and figure that out so why would somebody invest in this that's because this particular property here also had a hundred dollar per unit value added in other words every single unit we knew that we were going to be able to get another hundred dollars it was under rented it was poorly managed and we had the ability to put things in there like a washer and dryer which was an extra 40 a month per unit things like that so the bank said we'll give you 15 million which is about a 400 000 a year payment and that's gonna give you a cash flow of about three hundred thousand dollars what that is that's three hundred thousand against the four million that's almost a nine percent cash on cash return so that's how we raise the money we raise the money by telling the investors we think the property is going to produce about 300 000 but we need 4 million but as i said earlier we believe that we had a three hundred thousand dollar value add so what that did is that raised our noi to about one million dollars is actually 1.1 million by the end of the third year going into the fourth year and then we take this property back to the bank and at this point guys our payment of course is still four hundred thousand so we're making about six to seven hundred thousand a year in cash flow so our investors obviously are very very happy well over a ten percent cash on cash return what happened of course is we went to the bank and say what do you think the property's worth now and so we went and got an appraisal and it appraised at 25 million dollars because we had grown the net operating income by 300 000 and we said okay great so what kind of a loan will you give us and they said we'll give you a 20 million dollar loan i said awesome so what did we do with that 20 million we paid off the 15 so that loan's gone we paid off the investors now the investors are infinite they have no investment in the property anymore but they're still owners and we distributed about another million dollars because 20 million minus 19 was an extra million dollars that we distributed so here's the cool part but our our debt went up to 700k and of course our cash flow went down to 400k because it was a lot more than that so let's fast forward now we also getting some rental appreciation and we started to see that our net operating income went up to 1.5 million we went back to the bank again he said what do you think it's worth and they said we think it's worth about 30 million dollars so we said okay why don't we take another get some more debt against it so we put 25 million dollars of debt so of course we pay off this 20 million dollars and now we have another 5 million dollars that we distribute to the investors and the payment of course went up to about a million dollars and the cash flow was about 400k so what we did was here we became infinite at in the fourth year and then we kept distributing and we still own this property today and we're still putting new debt on this and by the way this is all tax free because this is a cash out refi this is a cash out refund and the money that we're distributing here and the money that we're distributing there is all not taxable because of what's called depreciation what we had the whole time is we had a depreciation expense of about 500k and so what we showed was a negative taxable income of 200k annually so the investors got 300 grand in year one but they reported a 200 000 loss and the same thing happened all the way along in all the other years this is a great way to get tax-free income using other people's money and returning it all and being infinite in the deal and having long-term perpetual cash flow this is the biggest difference between cash flow and capital gains right here this is the way that the rich get wealthy

Channel: Ken McElroy

Views: 46,224

Keywords: Rich Dad, Entrepreneurship, Investing, Personal Development, Get Wealthy, Earn Wealth, Ken McElroy, Entrepreneur, Rich Dad Advisor, Success, Business, Self-Help, Coaching, Real Estate, Real Estate Entrepreneur, Real Estate Investing, Freedom, Lifestyle Business, Hustle, making money, making money from home, financial success stories, other people's money, infinite return ken mcelroy, infinite return, passive income 2021, passive income real estate investment, passive income

Id: CPd6-jz0hH8

Length: 22min 20sec (1340 seconds)

Published: Fri Apr 30 2021