How I Borrow FREE Money

What's up you guys! It's Graham here. So let's cover something that continues to get brought up here on the channel, especially recently after some of my income breakdown videos. That is the fact that I actively try to borrow as much money as I possibly can to go and invest with and buy real estate with. Like ideally, I want to spend as little of my own money out-of-pocket as possible. I don't make any effort whatsoever to try to pay down any of my current mortgages more than I absolutely need to.

Now some people get it and understand the bigger picture of what I'm doing, but anytime my videos get pushed out to an audience that isn't familiar with the concepts of investing, or more specifically investing in real estate, I end up getting a rather intense reaction. That I'm setting myself up for bankruptcy, or I must have forgotten what had happened in 2008, or I should go and read up on Dave Ramsey, who took out loans to buy real estate and then lost everything and filed for bankruptcy.

But I got to say, even with all that in mind, my reasoning for trying to borrow as much money as I possibly can is a little bit less complex than people make it out to be. Really for me, borrowing money makes the most logical sense not only in terms of profitability, but also in terms of safety. As in, borrowing money for me is a lot safer of an investment than me going out and buying things and owning them outright in cash.

So let's go for my investment philosophy behind borrowing money and how you could use that to make way more profit. How that could be a safer investment than going and paying for something outright in cash, and also how I'm able to get money for essentially absolutely free. I'm gonna break down exactly how that works. And if you still don't believe me, I'm gonna do my best to change your mind by the end of the video.

Also, try to get you to smash the like button for the YouTube algorithm. It helps out my channel tremendously, so if you wouldn't mind doing that, we'd greatly appreciate it. Thank you so much, and let's get into the video.

First, I think it's really important to understand the nuances of debt and borrowing money. Make the distinction that not all debt should be automatically categorized as being bad. I think most people hear "debt" and they envision this $35,000 credit card bill for lavish vacations, where going and buying the newest tech gadgets means credit card companies just rake in thousands of dollars of profit from you in their absurd interest charges. Or they think of someone living drastically above their means, buying things they can't afford, and otherwise building a house of cards that could come tumbling down at any minute.

But I see debt as something completely different. To me, I view it as a tool, just like anything else that you could use to build your wealth, if you know how to use it correctly. To me, debt should only be used if you know what you're doing. You use it strategically and you use it towards something that makes you money. And that's the key word here: makes you money. If having debt does not make you money, then I think it's safe to automatically assume that debt is bad.

Stuff like that might include credit card debt, taking out a personal loan to buy things you don't need, getting too big of a mortgage that stretches yourself too thin financially. Stuff like that will not make you any more money. I don't think there's anything wrong with going and buying things you don't need, although it does mean that I will roast you on my second channel, the Graham Steffen Show. But it's okay as long as you could afford to buy those things outright in cash. That way, you're not going to be forced to pay any additional interest on top of something that is already an expense to begin with.

But on the other hand, if you do use debt correctly, you're gonna be going on to one of the main reasons why I love to borrow as much money as I can, and that would be leverage. This is when you borrow money in order to invest, and ideally that investment makes you more money than what you owe back in interest on that loan. For example, imagine borrowing $100,000 from a bank, and the bank says you have to pay them back with a 4% interest rate or $4,000 per year. But you know you could invest that $100,000 to buy a small house that might make you $12,000 a year in profit or a 12% return.

That means you've just paid $4,000 in interest to make $12,000, meaning you've just walked away with $8,000 in profit without using any of your own money. Now you might be asking yourself: why would a bank ever agree to loan money at four percent when they can just go and invest that money themselves to get a much higher return? And that is a good question with a very complicated answer. But really to sum things up, banks are in the business of what's called risk management. Loaning out money is generally a lot safer than going into investing it.

So banks will loan out money to their customers and then turn around and sell those loans to other institutions for a nearly risk-free quick profit. But banks also enjoy this type of leverage as well because they don't need to have $100,000 in order to lend $100,000 to you. In fact, with the term known as fractional reserve banking, banks can lend out up to ten times the money they have on hand and are only required to keep about 10 percent in cash at any given time. So if a bank has $10,000, then theoretically they can give you up to a $100,000 loan and then that bank could turn around and sell that loan to someone else or hold it until maturity, making a very quick tidy profit from this.

Then you get the ability to go and use that money towards actively managed investments that will get you a much higher return. Now here's why borrowing money makes way more sense for me and exactly why I do it. Now when it comes to real estate, you have two ways to buy a property. Number one is buying it in cash and owning it outright, and the second is what most people do, and that is to borrow money and take out a loan to buy real estate and get what's called a mortgage. By going and taking out a loan on the property, you could end up making way more money than you could otherwise.

Here's an example. Let's just say you go buy a $100,000 home, and you paid for it outright with $100,000 in cash that you've saved up for. Now you don't owe any money on that house. Let's assume that house brings in $10,000 a year in profit with rental income. That means this property is making you $10,000 from a $100,000 investment, which works out to be a 10% return on your money. That is known as what's called a cash-on-cash return.

However, now I'm going to be showing you what borrowing money does to these returns. In this scenario, you buy the same $100,000 house, except instead of paying for it outright in cash, you put $33,000 down as a down payment and then you get a loan for the rest, meaning you now have a mortgage for $67,000. Now to keep things simple, let's just say that loan costs you 5% a year, which works out to be $3,350 annually. Now this property still makes you the same $10,000 a year, except now you have to pay $3,350 towards your mortgage, leaving you with $6,650 a year in profit.

However, as you could start to see here, you only invested $33,000 in order to make $6,650 a year, which works out to be a 20% cash-on-cash return from the money you invested. That means you've literally doubled your return investing in real estate by getting a loan, going into debt, and leveraging your money. Not only that, but if you have $100,000 saved up, this means you have the money to go and spend $33,000 three times on three different down payments to buy three rental properties that all do these exact same numbers instead of going and buying one property outright in cash.

Now when it comes to doing this, it's really important to understand that not all loans are good, and not every property makes sense to buy. So I'm very careful about the loans I do take out because you don't want to get in over your head or have any chance of losing money. So for myself personally, I will only take out thirty-year fixed-rate loans with a low interest rate. That means my loan payment doesn't change and is fixed for the next 30 years, so I have the exact same loan payments on year 29 as I do today.

That means I could better predict my cash flow. I'm not gonna be hit with any surprises, and there's no chance of the bank ever asking for all the money back on short notice, regardless of what happens with the economy. Then after 30 years of making payments, I'll own it outright. I won't have any more loan on it, and anything else I make will be 100% profit.

So in addition to that, the interest I pay on these 30-year fixed-rate mortgages just becomes a tax write-off against the rental income I receive, helping me pay just a little bit less in tax. Here's how that works: By paying 3.5% interest on a $100,000 loan, that means $3,500 per year is going towards interest to the bank. According to the IRS, that $3,500 is seen as a business expense that saves me a lot of money on my taxes, considering now that my top-end tax bracket is over 50% between federal and state income tax, which is a lot.

So effectively, a $3,500 tax write-off saves me $1,750 in taxes. It's also another major reason why for many people they prefer to keep a mortgage on a property rather than try to pay it off early. Because without that tax write-off, I would pay way more in taxes with zero upside. So effectively, me taking out a 3.5% mortgage is like, after taxes, I'm only paying half that or 1.75% fixed for thirty years, which is really, really low. Savings accounts will pay more than that.

But it doesn't stop quite there, because when you take out a long-term loan, you also need to consider the power of inflation. This is what happens when more money gets printed into our economy; and the more money that gets printed, the less our money is worth. It's almost like cutting an $8 pizza into four slices, and each of those slices is worth $2. But if you cut that same pizza into five slices, well, it's still an $8 pizza, but now every single slice is worth $1.60, because you get now a little bit less.

The exact same thing applies to your money, and the more the government prints money, the more it's like cutting a pizza into smaller and smaller slices. For the most part, the Federal Reserve tries to keep inflation hovering about 2% annually, which means that one dollar you have today is gonna have the value or purchasing power of 98 cents a year from now. In other words, you'll need one dollar and two cents next year to buy what one dollar can get you today.

Now all of this might sound really annoying and just disheartening to hear this, but if you invest in real estate, you can use this to your advantage. As a really simple example, let's just say you have a $100,000 mortgage, and the bank tells you that you're gonna have to pay back that loan in full 30 years from today. Now that might seem like a lot of money, but because of borrowing $100,000 in today’s money and then paying it back with $100,000 worth of future money, that $100,000 is not gonna cost me as much as I think, because it's not adjusted to inflation.

Meaning about $100,000 in the year 2050 will be worth what $46,511 is today. That's almost like someone telling you I'm gonna give you $100,000 and all you got to do is pay me back $46,511 in the future. Anyone would do it; that's a no-brainer. So that is exactly why I do it. This is also how I'm effectively able to borrow money for completely free, meaning it's cheaper for me to borrow money than it is to pay for something outright.

And if that sounds like science fiction or like a scam or anything like that, here's how I'm able to do it. First, I'm getting a low-interest fixed-rate 30-year loan. My average interest rate between the three mortgages I currently have is 3.52% on about $1.7 million. When you consider that the interest rate I pay is a tax write-off against the rental income I receive, it's effectively like I'm only paying half of that after taxes or 1.76% in interest net out-of-pocket at the end of the day.

Then that amount is also lowered by inflation, because every year my outstanding loan balance becomes easier to pay off with future money that's worth less. Like if you go and look, this year that inflation was 1.76%. That means when you factor in inflation and tax write-offs, it's like I'm getting loaned money for 30 years for a completely free adjusted for inflation. Not to mention, it's likely that there will be years where inflation is above 1.76%.

Where, in a way, it's almost as though the banks will be paying me to borrow money from them to go and invest back into real estate. So in this case, it makes absolutely no sense for me to try to pay off early, because if I did, I would be losing money. Not to mention a few other major disadvantages. First, if I paid for any of my properties outright or I decided to go and pay off the current mortgages that I have, I would be tying up a lot of money in one place, meaning I couldn't use that towards any other investments out there.

That's what's known as an opportunity cost. That is when you have the opportunity to go and invest your money somewhere else that's maybe a better option, but you can't because either your money is tied up or you don't have access to it. Imagine locking up $1,000 in a CD right now that's earning 2% interest. Your opportunity costs might be the 8% you could have otherwise made if you invested that money in the stock market.

The same also applies to real estate. With real estate, I would essentially just be locking up that money to get a 3.5% return, which by the way, like I mentioned, is free after tax write-offs and inflation. Doing all of that to forego using that same money to invest somewhere else for a 5% to 10% return means if I went to pay off the mortgages, I would actually lose money than if I kept the money in cash and invested it somewhere else.

Second, by borrowing money, as odd as it is to say, I'm able to better diversify my investments, allowing me a safer spread of my money. For example, instead of tying up all $1 million in one property, I could decide to tie up $250,000 in one property and then spend the other $750,000 buying three other properties in different areas. That way, I don't have all of my eggs in one basket. If one of those properties does poorly, it doesn't make as much of a difference because I have three others that are doing well.

That applies to pretty much any investment out there. Like I could spend that $750,000 on stocks, bonds, index funds, and a variety of other things, all of which would give me a lot more diversification than sticking all of it in one single property and having that be a make-or-break it. So almost in a way, borrowing money can give you a lot more safety and liquidity just in the event you need the money or have a better opportunity available to you.

Now, I do think there are some advantages of paying with cash or not having a mortgage, and I think these are worth mentioning here in the video just so I have a balanced perspective. Like first, when you pay cash for something, you have a lot less risk. You're not gonna have to worry about having high overhead or a property not cash flowing or not being able to make a mortgage payment, because pretty much everything you do at that point is going to be profit. Pretty much any property is going to cash flow when you don't have a mortgage on it, so there's a lot less risk if you have a vacancy or a big expense comes up or anything else that comes up that eats into your profit.

The second, when you own something outright, you have a lot more peace of mind. I do admit there is something to be said about owning something outright and not having to make any payments on it. It just means you're gonna have a safer, more predictable return. You're not gonna have to worry about making mortgage payments; everything you make is profit. Whenever you sell the property, you get whatever it's worth back in your pocket. Really, being that carefree can lighten up everything else in your life, and for that, I could definitely see the mental appeal.

Something like that is going to be worth a different amount for different people. And third, paying for something outright in cash is really, really easy. You don't have to get approved for a mortgage. There are no loan processing fees. You don't owe any interest, and there is no appraisal. You can close as quickly as you want, and there are no complications. It's really as easy as just initiating a wire transfer and you're done. Compare that to getting a mortgage, which could be quite a hectic process and sometimes take upwards of 30 days.

Sometimes you could also be more aggressive with your offer because you can close so quickly, which means that potentially you can negotiate a lower price if you're a cash offer. But overall, having done both—I've bought properties outright in cash, and I've also bought properties with the mortgage. I got to say I will take the mortgage option every single time. At this point, with rates as low as they are, and tax deductions as valuable as they are, it just makes the most financial sense for me to borrow money instead of tying up my own capital in one asset and not really putting it to its best use.

Not only am I effectively just getting free money, but I'm better able to diversify my investments. I'm able to invest in other areas that yield a higher return than what I'm paying out in a loan, and I have more capital available to me to jump on other opportunities when they come up. Now I'm not saying that everyone should go out and try to get as many loans as possible for the sake of getting loans, but for certain situations with certain investments, if the numbers make sense, it could be really advantageous when you fully understand what you're doing and take smart, calculated risks with long-term fixed-rate mortgages; and only take on debt that makes you money.

Or in other words, just don't be stupid. Don't be reckless. Don't be greedy, and don't borrow more money than you feel comfortable paying back. Play it safe, take it slow, continue learning, and never forget to smash the like button for the YouTube algorithm.

So with that said, you guys, thank you so much for watching! I really appreciate it, as always. If you have not already destroyed the subscribe button, make sure to subscribe and hit the notification bell so YouTube notifies you anytime I post a video. Also, feel free to add me on Instagram. I post pretty much daily, so if you want to be a part of it there, feel free to add me there. Also, feel free to add me on my second channel. That is the Graham Steffan Show; I post there every single day I'm not posting here.

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Thank you so much for watching, and until next time!