If you study financial success books on investments, you will likely come across the terminology “OPM.” It stands for other people’s money. The idea is to start with nothing, but use other people’s money to become fabulously wealthy. Widely used in the real estate world, this concept of financial leverage and OPM is often hyped on infomercials.
How does it work?
You want to buy a rental property, but you don’t have the money. You put down a small amount and finance the rest from the bank. Let’s say you buy a house for $100,000, but you only put down $5,000. When the price goes up to $150,000 and you sell the house, in addition to the rental income you earned, you pocket $50,000. In simple terms, the magic of OPM is that you made $50,000, but you only used $5,000 of your own money (if anything at all!). That’s an extraordinary return on your investment. Obviously, given the housing downturn, many people are realizing that the $100,000 home doesn’t necessarily become $150,000 and could end up at $50,000. That has been a painful lesson to many, but the OPM concept is still a valid approach.
My entire life has been spent studying a different type of leverage—one leveraging not other people’s money, but something much more valuable. And its value is always there and cannot go down. In fact, the more it is used, the more it goes up in value.
What is it?