How to Make Money Work for You and How to Use Good Debt

December 18, 2022 Riley Caldwell

Index:

Before we begin, I’m gonna stress something to the demographic who’s most engaged on this site - Australians.

From my research and observation of different finance podcasts and resources like YouTube, it’s become clear to me that Australian culture is FIXED on debt solely being bad.

I think we fatally misconceive its potential to build wealth in this country.

Now the reason I bring this up at the beginning, is to warn you that whenever the MAJORITY of people hold a specific opinion on something, especially regarding money, you should question it like there’s no tomorrow.

The simple fact that most people in Australia are scared of debt (and also financially struggling) means that you should probably fall in love with it.

The beliefs of the average person - are exactly what make them average.

So, with that out of the way, let’s proceed.

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**What’s the difference between “good” and “bad” debt?**

**OR what I call, “The Donkey Dichotomy”.**

First we need to understand that there are 2 types of debt.

Consumer/bad credit - purchasing depreciating items you can’t afford and that don’t provide you with cashflow. Cashflow is any money deposited into your account through an asset such as a business, dividend-paying stock portfolio or rental property. Cashflow could also be money reinvested immediately back into the asset. The interest you pay on consumer credit is also taxed.
Investor/good credit - borrowing money to put into an appreciating asset with the potential to provide cashflow, such as a business or rental property as previously mentioned. The interest you pay is tax deductible here.

Let’s first understand that using a credit card to purchase something you can’t pay for with your own money is blasphemy.

There’s a difference between using a credit card to purchase goods with money you genuinely don’t have, and being smart.

By being smart, I mean that you could purchase goods with a credit card that you actually CAN afford, but with the intention of paying that amount back to the bank with your debit card within the usual 21 day grace period, so that you don’t pay any interest.

This way, you rack up a better credit score and gain credit points to use to redeem benefits.

But MOST people don’t do this.

If you’re like most consumers, you’re probably thinking after reading that, “yeah yeah, I’m smart with credit… (I just forget to pay everything back sometimes)”.

That’s what the banks are counting on, and with an average household debt of $86,000 in Australia, it seems to be working out for them.

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How can I use debt to get wealthy?

How to Use Margin Loans to Make Money

Also known as gearing, this is investing in hopefully appreciating stocks with borrowed money, usually at a maximum of twice what you’ve already invested.

For example, I have an approximate $6000 two-fund portfolio in the stock market.

I could get an additional $6000 loaned to me on behalf of my bank, which I could invest, bringing my total nest egg to $12,000.

If I’m paying 4% interest on that per annum (p.a.), then I’d need to be making more than 4% from my portfolio via both dividends and appreciation.

If my portfolio, with dividends included, increases by 8% in the next year, I pay the interest to the bank and take home a cheeky 4% profit on that $12,000.

Here’s another example of how margin can be helpful:

$100,000 value before borrowing at an LVR of 33.33% or 50,000, at an interest rate of 4.24%.

Your job salary is $100,000 and after tax, you get $73, 284 or tax paid is $26, 716.

Your stock portfolio returns 8% over the year.

Your interest paid on the $50,000 borrowed is 4.24% or $2120.

This interest is tax deductible, so your taxable income is reduced by $2120 down to $97, 880.

With the same tax rules, your tax paid actually becomes $25,805, or a gain of $911 simply in tax deductions.

Now, because the interest that we paid actually MADE us $911, we can subtract that from $2120 and see that we technically only paid $1209 in interest.

If we divide this by the borrowed amount of $50,000, it becomes evident that our interest rate has actually decreased to 2.42% (1209/50,000 x 100), which is excellent.

Now, what about our actual returns?

If we subtract the loan amount of $50,000 from $162,000 as well as the $2120 of interest initially paid, we get a total end of year value of $109,880.

$109,880 - $108,000 = $1880 increase in gain.

Which technically brings our net increase to 9.88% instead of 8% on our initial $100,000 - a nearly 2% increase.

Continue this year-0ver-year, and you’ll make significantly more than if you didn’t use margin.

However, the whole problem with margin loans is the potential for a margin call.

A margin call would happen if your portfolio falls below the maintenance margin.

So if you’ve borrowed some amount of money and now have a total portfolio value of $10,000, you might have a maintenance margin of 30% or $7000.

If a market downturn decreased your $10,000 by 40% down to $6000, that’s below the $7000 and you’d receive a margin call.

You’d need to either deposit another $1000 of your own money into the account or liquidate part of the borrowed amount to get back over 30%.

Click here to check the math.

Basically, you’d wanna be a fair bit more diligent in checking your account’s performance than if you weren’t using margin.

But that depends on how volatile your assets are; I’m invested in VAS and VGS, which are both pretty stable ETF’s.

So, for something like cryptocurrency, I would absolutely NOT invest on margin.

For me, I don’t currently invest on margin at all and I pretty much never worry about the performance of my stocks by simply investing over time.

If less time spent worrying about your portfolio sounds good to you, then maybe margin isn’t the best option, but it seriously depends on your level of education on the subject of borrowing as well as on your investments and their volatility.

I did hear that Warren Buffett doesn’t like margin investing, he says “it’s crazy in my view to borrow money on securities”, so keep that man in mind.

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Is getting small business loans a good idea?

For cashflow

When people have ordered from your business but the money hasn’t arrived in your account yet, you kinda run out of money for inventory or even to fund your own living.

In this scenario, you can get a loan taken out and pay it back once you receive the money from your customers.

Your proof and collateral to the lender here would be your accounts receivables or legal claims of payment from clients.

Basically, you sell these promises to the lender, which is known as invoice factoring.

Most of the time, the lender will repay you 70-90% back on those invoices, so you’ve pretty much just paid your interest.

But you could get paid 90-95% if you have a very good credit score.

Equipment

One could also get a finance lease taken out on equipment or a vehicle NECESSARY for your business.

The lender would buy certain equipment for you, rent it to you for the life of the loan and you simply pay the rental amounts + the residual value of the asset at the end of the term if you want to purchase it.

It’s worth mentioning that the lease payments are tax deductible

A Chattel Mortgage is similar, but your business actually purchases the equipment with the full loan amount, and then pay it back over the life of the loan.

However, you’ll need to pay both interest and for the depreciation of the equipment or vehicle.

This is where you must be honest with yourself about the necessity of what you’re borrowing…

If your business literally couldn’t function and make money without this equipment or car, then it’s valid to start approximating just how much money that thing could help your business make.

Otherwise, if you can make money without it, don’t take out these loans because you’ll simply be losing money and the equipment or vehicle will be a liability and not an asset.

Advertising

You can also use take out a small business administration (SBA) loan to pay for advertising, providing inventory, property such as your own or that which a brick-and-mortar business sits on or equipment as collateral.

If you’re starting a physical business or brick-and-mortar, you’ll need a business plan.

For most online businesses, you won’t actually need a business plan.

You can use term loans, SBA loans or even short and long-term online loans for your business.

Online loans seem too good to be true, so I’d THOROUGHLY do your own due dilligence on those.

Two companies I found were Lumi and Maxfunding.

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Now… Real Estate

Is it hard to make money with real estate?

Leveraging with no money down with collateral

Let’s look at an unconventional example to start us off.

You want to own a new Nissan GT-R but don’t want to use your own money.

Let’s say that one day, you own a house valued at $1 million with $3000/month of rental income and you also have a good credit score; you go to your bank, ask for a home equity loan (or maybe a HELOC’s better, I’m not sure) and borrow the entire amount of money for the car and use the $1m equity of the house as collateral.

The lender agrees that the house is adequate security and you get the car with no money down, and you merely ensure that you can pay the interest on the borrowed amount with the rental income from the house - assuming you are renting it out, otherwise there’s no cashflow.

You’d also need to account for property taxes, insurance and anything that wears down or is damaged within the home (or just make your tenant pay extra for these things).

If you don’t currently own a home, look into renting out real estate properties simply by getting a mortgage on one and then charging the tenant more than the interest you’re paying your lender - again accounting for the expenses I just mentioned.

Then, you can slowly build assets with equity that you can use to finance your GT-R.

OR use the home of someone you know with their permission as collateral, although I don’t know why anyone would risk that much just so you can buy a Nissan GT-R.

I’d just like to clarify with this example, DON’T TAKE OUT CAR LOANS.

I say that because cars are not assets, unless you’re actively receiving money from someone who’s renting YOUR car from you - for some reason.

This example covers what wealthy people do to get nice stuff; they use equity on true assets like real estate, their stock portfolio (sometimes in their own stock, like Jeff Bezos with Amazon stock) and businesses as collateral to both provide security to the lender, and then provide enough consistent cashflow to pay off the interest on the new purchase - like their fancy new car or yacht.

Now, this is also why wealthy people often don’t sell their assets, because then they’re not building equity and would have less collateral to buy the luxury that they want in the future.

Like if you sold your house for $1 million, you’d probably lose over $100,000 to taxes, commissions and other government costs.

Plus, that’s one less asset you have to use as equity for purchases.

But keep in mind, the whole reason real estate is so good for getting free money for luxury, is that it can provide cashflow.

So, if you’re like most people and actually LIVE in your house, you’re paying for the home and/or the mortgage.

There’s no cashflow there; you’d want to rent out the house and then use it as collateral to borrow money and to move yourself to another place.

In the best case scenario, you only pay for your new accomodation, while your tenant pays for the mortgage on the house they’re renting and MORE directly into your pocket - so you still have cashflow to pay the banks when you want to make purchases.

Obviously in this case, you need to have an external income to pay for your personal accomodation and living expenses.

Alternatively, use the $1m of equity in the house to pay for four 25% down-payments on four properties (250k each).

75% is borrowed from the bank and you pay back your mortgage payments + interest as well as the expenses I’ve mentioned like property tax, insurance and damages.

Rent the four places out and make their rent pay for it all.

Then, as the mortgage is slowly paid off, as the value of these properties appreciates and as you improve the properties and consequently increase the equity/value even more - you can find excuses to increase your rent prices.

The cashflow of these assets will exponentially increase over time.

In this specific scenario, you’ve also built much more available equity for collateral (at least $4 million ($1m x 4)), which you can then use to borrow more money to put into more assets and repeat.

Seller financing or a Deed of Trust created with a Promissory Note.

Without involvement of the banks, you go to someone who’s estate you want.

You come to a Seller Financed agreement with them that states things like total purchase price of asset, the down-payment, loan amount, the interest rate, amortisation schedule, monthly repayment, tax and insurance responsibilities, balloon payment and any additional terms.

There’s 3 parties involved here; you as the trustor, the owner of the asset as the beneficiary and a third party or trustee (holds the power of sale in case a borrower defaults - typically a title or escrow company).

You’ll include within this agreement that you’re going to rent out the property and have them pay back the loan repayments.

If there’s no tenant, you’ll still pay the beneficiary.

Now you own an asset.

Basically, if you want to become wealthy, you need to use money to make money and not use bank money to purchase stuff that has no leverage, like clothes, electronics or food.

Debt from rental properties

Down payment of $20,000 on a cheap home will probably allow you to borrow $80,000 at least to take a mortgage out

You’ll rent the place out and use that person’s money to pay both the mortgage and the interest on the loan (at a fixed rate over 30 years is preferable).

Hopefully you found a good property manager and don’t need to personally worry too much about fixing broken stuff, renovations or improving the quality of the estate.

Now if the house price appreciates in 5 years, you can refinance it.

If the home’s now worth $200,000, you can get an appraisal and potentially get a new loan on that property for $160,000.

You’d pocket $80,000 (160,000-80,000), which is completely tax free and which you can use as a down payment on ANOTHER rental property and repeat the process.

In the same case of 20% down payment and 80% borrowed, you can now purchase a $400,000 property by borrowing $320,000 for it.

As you repeat this process and get more rent income to put on your tax return, you appear more reliable to lenders and can probably end up being allowed to borrow more than 80% and at a lower interest rate.

Keep in mind, however, that the 2008 financial crisis occurred because too many people were over-leveraged and had borrowed like 90-95% of the money for their real estate.

Also make sure you only take out Fixed Rate Mortgages and not Adjustable/Variable Rate Mortgages, and that the lender doesn’t have a call option.

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What’s a secret about real estate?

The current global increase in house prices looks positive for people who already own homes, whether they’ve paid off their mortgages or not, but it’s harder for those who DO NOT currently own homes.

Such as many young people reading this right now.

A fundamental and long-term reason for this appreciation is because real estate investors are the entities that banks distribute the majority of money to.

I’m talking about the money that’s created when YOU borrow money from a bank, as I’ve spoken about on my previous articles.

Global Domestic Product (GDP) is the final value of goods and services produced and is the primary measure for observing the healthy growth of an economy.

Real estate doesn’t count as “goods and services”, so while consumers believe that the economy is growing steadily as more technology comes out and stuff is produced, national debt is actually just rapidly increasing as money is created through loans and then put into the housing market.

It’s put into the housing market, by the way, because those buildings act as collateral for the bank if the borrower defaults or can’t repay.

The fact that this incessant funding toward housing doesn’t raise GDP means that it doesn’t impact inflation data either, even though debt is constantly increasing and thus, inflation too.

The consumer’s oblivious to the ever-increasing debt and prosperity within the economy and therefore, borrows more money, increasing debt even further.

So, it can be determined here that the health of an economy and the value of its currency via inflation is constructed completely by pubic perception.

Control their perception and you control money.

But control both the creation of money as debt AND people’s perception of money - and you’ve got an amount of power comparable to a god.

This is exactly what the banks do.

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What rich people have the most debt?

Supposedly, Donald Trump is the “King of Debt”.

Although, he was able to leverage debt significantly better than most people can, with the use of microscopic down-payments on real estate and tiny interest rates thanks to his political connections.

I mean, by becoming controversial enough and well-known, you could probably make some connections like that too.

But what we can learn from him, is to learn the ins and outs of borrowing money and just go talk to people and make connections.

That’s it!

This is absolutely not financial advice and you should consult a financial advisor before borrowing any amount of money or doing anything similar.

Also do your own research when it comes to investing and committing money and time to assets.

This is very important - be smart.

Regards,

Riley.

#peakypines

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