Chapter Seven

Made to Order Finance

I remember an occasion when I was in business; a real estate salesman brought in a deal which he had for sale, at a fixed price.

He had an apartment house lot, along with plans for a building and a complete breakdown of costs and rental schedule. It was a very completely organized proposal, and I said I would tell him the next day if I liked his package.

I worked on it at home that night and came to the conclusion that the projected income did not allow sufficient profit for the investment required. When I informed him, he said he would like to have a session with his boss and felt that he could present a more attractive project.

This he did, the very next morning. They had raised the rent schedule for all of the apartments and thereby showed a healthy profit.

Of course the rents were higher than I could reasonably expect to get. But the real estate people had shown a nice investment – by the use of simple arithmetic, but certainly not by being realistic about rental income.

In every get rich-quick real estate scheme of which I am aware, the road to success depends on borrowing every dollar possible.

A young man told me of a course that advocated a very unusual way to finance. The students were advised to secure as many credit cards as possible and borrow to the hilt on each one. I doubted that anyone would make such a ridiculous suggestion, until I saw it on TV.

Nothing was said about interest charges on such loans, which would run as high as 21%. This, in itself, is about all that it is reasonable to expect as profit on a legitimate deal.

One way to insure a no-profit real estate venture is to finance it with money at 21% interest. In fact, the less money that one must borrow to fund a project, the less risk one will have and the more profit.

The real estate authors and lecturers have not become fabulously rich through the kinds of deals which they advocate, simply because it is impossible to become wealthy by holding a debtor position.

One of these people may tell you that he has acquired four million dollars worth of property, and it may be the truth. However, a little investigation may uncover the fact that he owes $3,990,000 of the $4 million.

Copyright ©1995 Robert A. MacDonald, All Rights Reserved.
Last revised: May 10, 1998.