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How to Use Debt to Create Passive Income - YouTube
Channel: Ryan Daniel Moran
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- [Ryan] Alright so in this video
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what we're going to talk about is debt.
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Is debt good or bad?
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Should you use it?
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When I grew up I was
taught debt was really bad,
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you should avoid it, you
should pay cash for everything.
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And I believed that until I was
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like 27 years old until
I really started to see
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success with my business,
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and then I came full circle on this.
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I have a friend and a
business partner now,
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his name is Clement
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who had me think about this
a little bit differently
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and you might have heard the phrase
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"There's good debt and there's bad debt".
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That comes from Rich Dad
Poor Dad by Robert Kiyosaki.
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We're going to talk a
little bit about that
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and the difference in
how to identify that.
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So to illustrate this just for a second,
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let's assume that you've got a 5%,
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you've got 5% money out there.
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Whether that comes from
a loan from the bank,
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or you have a private investor,
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or this is what you pay
for your college debt,
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or whatever the source of the debt is.
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Or if you've got a really
good credit card that pays 5%.
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If so, tell me what credit card that is.
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So--
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what this just assumes--
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Alright, so if there's money coming in
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from outside sources, from The Cloud.
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This is from banks and investors...
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The question is not "Do
I take the 5% loan?"
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The question is "Where
does the 5% loan go?"
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What do we do with the capital from here?
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So, if we have
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a business
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and that business
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as a result of having capital allows us
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to release a new product,
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and that product is going to
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have a
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30%
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profit margin
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and it's going to grow over
time; accelerate sales.
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And that capital is what allows
us to release a new product,
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that could literally be 100% return.
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In fact, when we break down
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the reason why businesses
grow faster than others,
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it comes down to their ability
to turn over inventory.
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So the faster you can turn over inventory,
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the faster your business grows.
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And by that I mean sell through inventory
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and replace that inventory quickly.
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That requires cash.
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Sometimes it requires
cash that you don't have.
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Which is where this comes in.
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So, if this is a
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100% return,
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and I know that sounds
silly to some people
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but in business it happens all the time.
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I'm going to take, uh, I'll take $100,000
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and I'm going to take that 100K
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put it into a new product in my business,
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and at the end of the year
I had $200,000 in profit.
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So that's 100% return, right?
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So in this case, you have spent
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$5,000 to make $100,000.
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So in this case, is debt good?
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Or is debt bad?
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In this case, debt really good.
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We're good here.
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I want to take this money all day long.
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'Cause I know exactly what to--
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where to put it in my business
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so that it gets a higher
rate of return than 5%.
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We could also look at this
in a case of real estate.
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So if we borrow $100,000
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to put into a house that has
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a 10% return,
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and that 10% return comes from rent.
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And it comes from--
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If we pay $800 a month
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to pay this back over 30 years
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and we're getting $1,000 in rent,
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we're getting $200 in profit.
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We're also paying back this debt
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and the value of the house is
going up, is this debt good?
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100%, we're making 10% on our money,
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plus it's going up in value
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and we're paying off the debt over time.
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So in that case, debt really really good.
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Here's where it gets messy.
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What most people think of debt
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they think of borrowing money
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to get rid of it.
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And this would be credit cards,
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(writing on white board)
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or would be
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college.
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Now, here's where this is different.
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If you've got college debt
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because you went to
college for general studies
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and you're hoping to get a degree.
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Is there a clear way that
you can deploy that 5%
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in your education to earn more over time?
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As opposed to a trade school
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where if you're going to borrow money
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to go to this trade school
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and as a result you know
you're going to make
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65 to 85 grand a year for
practicing that trade,
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now we've paid for the debt.
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We've paid for the 5% loan,
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we know exactly what
the ROI is going to be
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and we can make this decision.
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Whereas what most people
do, what most kids do,
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and the government incentivizes
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which is just a ridiculous idea,
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is they say: "Just take out debt,
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go to college, you'll figure it out."
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And you have these kids who graduate
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with $100,000 in debt
and they can't find jobs.
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We should not be incentivizing that.
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We should not be encouraging people
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to take on that kind of debt.
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There's no ROI to that.
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Zero.
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Now, here's where it gets interesting.
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Especially if you are an
entrepreneur or an investor.
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Taking out credit cards or taking out
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5% debt to spend on cars.
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This is a really bad idea if you are
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just going to spend the money.
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But recently, I bought a new car; a Tesla.
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It was $100,000 car.
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And I took out a loan for it.
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Now what would I do that if I'm
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just spending it on something
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that some people would call frivolous?
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Well I bought it on debt
because I got a 2% loan.
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So at a 2% loan, what this allows me to do
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is it frees up
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$100,000 in capital.
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$100,000 in money that I would have
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spent on the car is now--
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What am I going to do
with that 100 grand now?
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I'm going to take that 100 grand
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and I'm going to put it here
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in something that
actually creates a return.
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I used that money to
buy a rental property.
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So I'm from Cleveland, Ohio.
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I bought a house for $100,000
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in North Olmsted, Ohio.
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And that is rented out,
it creates a return,
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it's going up in value,
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and what did that do?
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It allows me to pay this back no problem.
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And I'm actually getting a return
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on the money that I freed up.
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So I'm making, we'll just say it's 10%,
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I'm paying 2% and I have a car.
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So, we get a three-for here.
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Instead of
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spending the money frivolously,
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or wasting it on what Robert Kiyosaki
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would call "doo-dads",
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Took the money, borrowed
instead of spending it,
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bought the car.
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I'm now making payments on the car
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that is paid for by the house.
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(writing on white board)
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So, I got a free car.
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Instead I bought a house.
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I have profit.
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And I get to have my house,
my car, and eat my cake too.
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That's a really really good use of debt.
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Here's-- now I'm going to
make it super complicated now.
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What's really exciting about this,
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is that this, as this gets paid off
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as the house gets paid off,
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as the car gets paid off,
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if you want to make it super complicated
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now we've got value that
we could borrow against.
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We could literally
borrow against the house,
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again at 5%
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and go buy another house.
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This is what we call a multiplier.
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I have a podcast about
this on Freedom Fast Lane.
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You could probably Google
"Freedom Fast Lane Multipliers"
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it's called Only Invest Multipliers.
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A multiplier is something that
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if you have capital,
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take that money and put it into something
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that's going to have
an exponential return.
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So what that might look like is
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as I have an investment,
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I can borrow against the investment
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at an interest rate that allows me to
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put it back into the investment
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and it can actually multiply and compound.
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Which is really exciting and kind of sexy.
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So if you're interested in
making is super complicated
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you can look up that podcast.
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So if we were to totally simplify this,
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the question of debt comes down to
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the difference between the ROI
you're going to make with money
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and the ROI you're spending
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on paying that money back.
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So if we can borrow--
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Act-- Here's a fun story.
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My mentor, my buddy Clement before...
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So at www.capitalism.com we train people
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to start physical products, businesses,
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as a way to be an entrepreneur.
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So we have free training classes and stuff
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that you can sign up
for that'll show people
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how to start physical
products, businesses.
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And there's a site that some people use
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to fund their businesses called
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I think it's UpFund.
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And UpFund charges like 20%.
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20% to get a loan from them.
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Which people say is
crazy, that's exorbitant,
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it's like putting it on a credit card.
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But, if that 20%
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goes into a product that
going to make 100% return,
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I'll make that trade all day long.
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So the question is not,
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is this cheap money or expensive money?
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The question is, compared to what?
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Because if we could be
growing our business
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by 100% per year and we're not
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because we're not borrowing
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then we've actually lost all
that growth that we would have.
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Not to mention the customer
base that we would get
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and all of the individuals
that we could then
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market other products to.
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So in that case, debt is a
really really good thing.
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But is all based on what we do with it
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because if we're spending it versus
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putting it somewhere we have
a higher rate of return,
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that determines if debt
is good or if debt is bad.
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This is why people like Donald Trump
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use a tremendous amount of
debt to grow businesses.
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They keep their capital, invest their
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the debt into building other things,
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and that's how they
become super uber wealthy.
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And that's why debt is not good or bad.
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It's about what you do
with the debt that matters.
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Hope you found this video helpful.
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If so, share this with an entrepreneur
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or somebody you know who
would find value in it.
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Make sure you're subscribed
on Youtube and on Facebook.
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And we'll see you at www.capitalism.com.
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Thanks for watching.
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