Let’s pretend, for a moment, that you own a rental property, free-and-clear.
For argument’s sake, and to help complete the picture in your mind’s eye, lets say it’s in Phoenix, AZ, and its address is 3844 W Caribbean Lane.
Further, let’s say it’s worth around $220,000, and you can rent it for $1,500 per month. So, your gross yearly receipts on this $220,000 asset are $18,000.
As an investor, you know you need to constantly be asking yourself whether or not your money is performing for you as well as it could be. In the above situation, you have to wonder if that $18K/year is the best you could get on the $220,000 invested in the house. It’s actually very easy to imagine a realistic situation where borrowing against this equity can make you better off (in other words, using the tool of “leverage” to your advantage).
Let’s say you looked around town and found two other properties for which you could get $1,600 per month in rent. Imagine, for the sake of argument, that you offered $222,750 each for those houses, and the sellers accepted your offer.
You take out a 30-year loan for $148,500 against your rental property, at 7.25% interest. This gives you a monthly loan payment of $1013, leaving you still clearing $487/month in gross rents on your original property.
If you split that $148,500 in two and put down $74,250 on each of the new places, you can then take out two more loans of $148,500 each, at 7.25% interest. You’ll be clearing $587 per month on each of the new houses.
Notice what happened here: Your total equity is still $220,000, but now your gross yearly receipts are $19,932, instead of $18,000. Pretty cool, huh?
Why am I telling you all this?
Well, it turns out that my favorite guru, John R Burley, recently took out a loan against one of the first houses he ever bought in Phoenix. I’m not sure what he did with the money, but I wouldn’t be surprised if it was for something along the lines of the above hypothetical.
Still, it’s an interesting question, isn’t it? In the public figure of John Burley we have a guy who - when he's not claiming that no bank will lend to him, that is - goes on and on about how you should use “money partners,” how you should hide behind complicated corporate structures, how you should avoid owning rentals, and how you should live debt free… and yet here he is transparently borrowing a huge chunk of money on a property that I’m pretty sure is a rental. What gives?
I know that if I were actually a student of Burley’s I would really like to learn the answer to that question. And if Burley were truly interested in educating his students then I can’t imagine that he’d have a problem answering it, either. Isn’t it a perfect educational opportunity? I’m sure his answer would be instructive, and the above scenario is how I imagined he might answer it.
So, here I give you a tool you can use yourself to determine whether or not Burley’s claims to honesty, integrity, and a genuine interest in educating people in “the money game” are true. I encourage you to do the following:
- Go to the Mastermind Forum.
- Create a username & password.
- Post a message something like the following:
Dear Mr. Burley, I noticed that you recently borrowed $148K against one of the first houses you purchased in Phoenix—one that doesn’t appear to have been one of your “wraps.”Then, see if your message lasts longer than 6 hours on the site. Given that your post is not likely to survive more than a few hours, you have to wonder. Just what is it that Burley is afraid of? Why the unwillingness to be up front about this? Is all perhaps not well in Burley Land? What is he hiding?
See this link here for the loan document in question: http://recorder.maricopa.gov/recdocdata/GetRecDataDetail.asp?rec=06-0988815&bid=&sar=UnOfficial&amp;amp;amp;bdt=6/1/2006&edt=8/7/2006
Didn't you say that no bank will lend to you because you own too much real estate? Anyway, I was wondering if you might share with us what you planned to do with the borrowed funds, which are presumably to be used in the purchase of more investments.
I realize this may be none of my business, but I thought that since you always advocate using money partners and living debt free then it would be educational for us neophyte investors to learn of an investment situation that doesn’t call for that.