Business and Finance
How to Use Other People’s Money
By definition, OPM (Other People’s Money) is the act of using other people’s money to make your own money. How does this work?
Take real estate as an example – South Africa is currently faced with an epidemic where there is an influx of university students with a shortage of student accommodations. This is a beautiful opportunity and classic example of how someone can take advantage of OPM. To explain, allow me to create a character by the name of Andrew.
OPM in practice
On his way to work every day, Andrew passes a university and he realises the opportunity for building student accommodation on a field just three kilometers from the university. Andrew starts doing his research and he finds that the land costs R150 000.
Andrew contacts a real estate agent, who helps him put together a team of people to assist with the building. All in all, it will cost Andrew R400 000 to build the accommodation. Andrew sets out to present his idea to the bank and because Andrew has a good credit record, the bank manager agrees to give Andrew the loan without a deposit. Andrew is liable to pay R3 500 per month on the loan.
Andrew commences with building and after a few months, the building is completed. Immediately Andrew starts recruiting tenants and manages to get 10 tenants. Each tenant is liable to pay Andrew R1 200 per month for rent (excluding electricity).
This means Andrew makes R12 000 in revenue per month. Andrew uses the revenue to pay off the loan and some administrative and maintenance costs, which leaves Andrew with R5 000 in profit (for example).
The above is just a rough example of the OPM principle. The most important thing to note here is how Andrew built the accommodation with someone else’s money, and in-turn paid back the loan with someone else’s money. Andrew is making money using other people’s money.
Not all debt is bad
OPM challenges the dark connotation on debt: debt can be good debt, but for debt to work for you, a good and functional plan is required. The most important thing is research and a reliable team and advisory structure.
OPM can be used in other instances, not just in property.
You can use OPM in publishing; you find a publisher to produce and market your book for you and they pay you royalties. The publisher makes use of their own money to print and market the book, while you receive royalties.
The main lesson taught here is the value of asset building and simplified cash flow principles. The basics of cash flow management are ‘earn more, spend less’! So spend less of your own money, find opportunities and earn more.
About Lebogang Mokubela
Lebogang Mokubela www.asklebo.co.za is a personal finance coach, leadership speaker and author. Having studied BCom Marketing and a course in Social Media Strategy, Mokubela currently serves as director of Perx Agency; a brand activation and sales agency based in Johannesburg. His current research involves study of the factors of cash flow management, investing, leadership and business management.