What is other people’s money? When you buy real estate, you usually get a mortgage which is other people’s money. It is a way of leveraging your down payment in order to buy an asset. When you borrow money to buy a business, it is other people’s money. Whenever you borrow money to make an investment or financial transaction, you may be using other people’s money (OPM) in the form of a loan.
It does not take money to make money! It reminds me of a quote about firefighters. They are the people who run into buildings when everyone is running out! People who are wealthy buy when everyone is selling or take risks when everyone is risk averse. Do wealthy people know something the rest of us don’t? They have courage to do things when the rest of us don’t.
Money is officially legal tender defined by government exchanged for goods, services or debt. It is how we use it that will make you wealthy or just pay the bills. Money is used as payment for services such as payroll. You work and earn money in the form of a check, direct deposit or cash. If you own your own business, you need cash to give change, pay for goods and services or pay your employees. It is hard to live without money.
I live very well without cash! I have direct deposit for my paycheck; I use credit cards and avoid cash as much as I can. Some people would say I am using other people’s money by using credit cards for almost all of my purchases. Although it may be a credit card, I treat it as a charge card. I always pay it off at the end of the month. Using a credit card is a cash flow device. If I switched to cash, it would affect my budget! Besides I would lose out on rewards such as frequent flier miles, cash rebates and hotel points.
Many personal finance bloggers think debt is bad, but imagine buying a house with cash! The real power of money is using it which includes using other people’s money in the form of a mortgage. A 20% down payment with an 80% mortgage at 3% seems like a no brainer! If your home appreciates 5% a year, your down payment is earning a better than market return and you are earning more than you have to pay in interest. Sounds like a win/win!
The mortgage interest is tax deductible which means you are subsidized by the federal government to buy a home. Housing and businesses are subsidized by the federal government because it helps our economy. When I invested in apartment buildings I used leverage to buy an asset. Unlike a home, you can generate income from a business asset. I would buy an asset that I knew could increase by just making small improvements and generate more income. Very similar to any business,
Businesses are sold all the time and usually there is some financing involved. It is leveraging an asset. You are using other people’s money to buy an asset that you believe is undervalued and you think you can increase the income. You get to use other people’s money at probably 4-5% rate and you can generate more income that exceeds your expenses and generate a profit. Although you can expand or grow a business with profits generated internally, it will take longer.
Borrowing money will help you reach your goal faster or maybe reach economies of scale. It takes more management to operate small apartment buildings (duplex & fourplex) than owning larger buildings. That may mean borrowing more for either more units or larger buildings. Most businesses borrow money for their business. Doesn’t it make sense to borrow money that you may pay approximately 5-6% to earn a profit of 25-50%? It is the basis for business and the economy. Bankers are lending other people’s money for the margin they will earn.
Business does the same thing! They are looking at their profit margin and determining if they can afford to expand. They look at using their cash and/or borrowing funds (OPM) to generate better profits. The wealthy people have access to money in the form of other people’s money which helps them to buy assets. On a large scale, there are mergers in the airline industry to lower costs and generate more profit. Still, more often companies go public to generate cash to grow their company. The stock they sell draws other people’s money to help the company grow.
Although debt is a four letter word, it is not bad! If you can buy a business, assets or expand an existing business; you generally use a loan to do it. A loan is other people’s money who is earning a return on their money. I know there is a desire to reduce or pay off debt, but it should be debt that is not associated with an asset that appreciates or generates income. Using other people’s money to help you build up a portfolio of assets that will increase income or net worth is desirable.
Photo by: Alan Cleaver
My Financial Independence Journey says
It all comes down to what are you going to use your debt to do and how much interest are you paying. Paying 5% interest to get an income producing property is smart. Paying 25% interest to pay for an entertainment center is stupid.
I agree! It is one of the reasons, I never had consumer debt.
Jenny @ Frugal Guru Guide says
I plan to pay off our home mortgage early, but I wouldn’t pay a penny extra on rental mortgages. One is an investment. The other really isn’t, or at least historically is a lousy one!
It depends! If interest is low, you can probably earn more elsewhere.
Daisy @ Prairie Eco Thrifter says
I agree with the commenter above. Not all debt is bad, but some is (ie consumer debt that you aren’t paying back each month). I use my cards for everything because I get rewards points and also because my money is better left in savings until the end of the month accruing interest. I pay it off at the end of the month, but if I didn’t, it would be a bad idea.
I do the same thing. I love the concept of leveraging a down payment to buy a home or income property.
Haha, OPM is the best. You know I’m on your team with the mortgages – I’d rather live in the home now and invest elsewhere, with a known monthly payment… than save for 20 years and buy in cash, hoping beyond hope that prices drop.
I’m at the point I look at companies without debt with a skeptical eye – companies can borrow under 2%!
Too often, debt is viewed as good or bad vs. what you can do with it. I know it helped me amass considerable assets and ultimately a lot of profit.
John S @ Frugal Rules says
Good post! Like others have commented, I think it comes down to what kind of debt you’re taking on. If you can use OPM to further yourself and leverage it wisely then I think it’s a great thing to use.
I think it is one of the best uses for money or debt!
Kyle @ Debt Free Diaries says
Sometimes using other people’s money is a great idea! I intend to use a mortgage to purchase rental properties, however I wish to use cash to buy our house. I’d rather keep all “personal” debt non-existent and only have debt for business assets.
In Los Angeles, I would have to wait a long time to afford a home for cash. Despite that statement, I expect to buy my last home for cash. I am still thinking a mortgage may make sense even in retirement. The low interest mortgages seem like a great deal.
I’m financing a weekend Vegas trip on a new credit card I got. Interest is low at 1.9% for 3 months so will pay off before that.
Hmmmm, I hope you win at Vegas otherwise the payments will hurt!
Before continuing, I have to say that it’s probably a bad thing for all of us that other people’s money is being sent to subsidize homeowners.
That said, while the law exists, as the owner of two rental properties, I am going to take advantage of it.
You may find it more acceptable if the home that receives a subsidy is in your neighborhood. Without the subsidy, the home would be foreclosed and affect home values. I agree the concept stinks until it affects your local area. The financial crisis could have destroyed home values in a lot of neighborhoods.
Low interest mortgages has helped the real estate market come back and encourage a lot of people to buy properties beyond a personal residence. I wish it was available when I owned income property.
Ah, but people had access to this before the financial crisis, leaving them open to buying more of a less liquid asset house than they would have otherwise.
And yes, the neighborhoods that both of my properties are in took big hits during the crisis and many of my neighbors were foreclosed upon.
It has helped the real estate market come back, yes… but will it disappear to keep the market from bubbling too big again?
Although I strongly believe in real estate as a one way to wealth, it is not the only investment. Particularly for a minimum wage earner, they might invest in the stock market as a way to wealth.
The First Million is the Hardest says
Debt is a very useful tool when used correctly. The problem is that the majority of people rely on debt to buy things they don’t really need instead of buying things that will appreciate in value or produce income for them.
The high interest credit cards was a discouragement for me! Maybe, it is just too easy to use credit cards which place the responsibility on the individual to control their impulses.
OPM is something that makes more sense for people with good cash flow than for those with little income. Great stuff…other people’s money? Give me some, please!
I should have given a P.O. Box in my article to have you send checks! 🙂 In many instances, the asset you are buying, will have cash flow to support the purchase. Of course, a mortgage on a personal residence requires personal cash flow.
Definitely depends on usage, as you point out. Making long term investments while borrowing is stable; if those do not pan out, the consequences can be intense…
Perhaps, but you should do your research before investing in anything.
Digital Personal Finance says
Debt as an investment to get higher returns can be an intelligent use of financial thinking, while using debt in order to buy material things that one wants can be an example of lack of financial thinking. All depends on how the debt is used!
It goes back to financial decisions. Two people can earn the same amount of money and choose to spend their money differently.
I would never have been able to buy a business or our home without OPM, but I do now want to own the home outright. I see no reason to pay off the rental property. Someone else is paying that off. The ultimate in OPM. Bank money to buy and renters to pay it off.
I totally agree and make a profit!
I agree that debt is not bad if managed well, and there are many people that do that. I find it interesting that in the states you can write off your mortgage interest.
There are 2 reasons doe the mortgage interest write off. The government is encouraging home ownership and the housing lobby is very strong. The economy is stronger when the housing sector is growing so it helps society with jobs and housing.
Darwin's Money says
Great points; this is a huge distinction between how the rich view money vs. the rest of us. They put other people’s money to work for them.
See it takes money to make money, but it doesn’t have be yours!
Shawn James @ PipsToday says
I have always been diplomatic about the use of credit money. I have bought many big assets of mine by financing them from a finance company. It’s good to do it and the best part is that paying money is not a burden at all. But I am always against the usage of credit card, because it feels like I am using the money which I don’t have although the amount of money is much lower than what I’ve already paid to finance companies.
Although I believe in using other people’s money, I am opposed to pay usurious rates for necessities. I believe you should get the lowest rates and use the money for the purchase of assets that will appreciate.
Alexis Marlons says
Using other people’s money gives you a great deal. You just have to be responsible on knowing your responsibilities and limitations especially when it comes to debts.
You should only use other people’s money for assets that will appreciate.
Indeed I do!! How else do I survive if I lived on cash? Imagine buying a house by paying off cash. I prefer using my cash only for essentials.
One of the best parts of buying a home is leveraging your down payment using a mortgage at these low rates.