There is a popular saying that states, ‘It takes money to make money!’ Now if you have just looked into your wallet and are now thinking that this automatically erases the relevance of this article to you, then hold on. While that popular statement may be true, it doesn’t always take your money to make money.
It’s the thing that successful businesses and people do all the time, leveraging. Leveraging other people’s money to capitalize on investment opportunities. Whether your plan is to buy an investment property, start or expand your business or place funds in an investment portfolio, there are many avenues available for you to capitalize on someone else’s cash.
Simply put, you can borrow money to invest in your desired venture as long the profit is able to cover the interest and then some. There has never been a better time than NOW to do exactly that! This is because with the stipulations that the IMF has imposed on Jamaica, we have never seen interest rates this low. To put it into perspective, according to the BOJ average lending rates from Commercial Banks were as high as 61% in 1993, but at the end of 2013, rates were at 14.56%.
With this approach, in order to make money rather than lose it, you need to fully assess your ‘making money’ plan to see its viability. Do all the research and work that you would do if you were investing your own hard-earned dollars; because you are!
Let’s look at a few examples of what we are talking about. Let’s say you see an opportunity in the real estate market, you could take out a mortgage to buy rental property or increase the resale value of your current property. With an NHT loan averaging about 7% versus the potential rental property yield of 8-10%, that could serve to be a viable strategy.
You can utilize debt and equity financing to raise cheaper funds as a means to start your business, reduce your company’s cost of debt or finance expansion projects compared to that of commercial bank loans. In this current market cost of funding could range from 12-16% for a secured loan. While the average return on equity for companies who raised capital on the junior market is about 21.95%.
Another example of utilizing this powerful strategy would be investing borrowed funds in a mix of assets yielding a return that you expect will outperform your hurdle rate. Let’s say for example, you borrowed on your savings or investment account for 5yrs at a rate 12%. You could have then invested those funds in a US dollar fund like the Spider Energy ETF or S&P China ETF that both have a 5 yr. Annual historic return of 13% (in J$ terms 18%) and 15% (in J$ terms 20%), respectively.
As we think of this powerful strategy, we must remember that with great power comes great responsibility. So we can’t over emphasis enough the need for careful and consistent research on any investment opportunity you are embarking on. Be especially careful with variable rate loans. They are ideal for shorter-term investments when rates are low. And remember, as timeframe rises, so does the interest expense. The unknown factor of what the interest rate will be next year or the year after increases your risk significantly for long-term ventures.
Here is the bottom line, once you get proficient at using other people’s money to earn profits; your earning potential is almost unlimited. If you don’t believe me, ask Warren Buffett.