As long as you invest in the right stuff, borrowing money will help you build wealth quicker
Contractor tip of the month
By Damian Lang
It’s family vacation season. Whether it is a delayed flight or an 800-mile road trip, you’ll probably hear, “When are we going to get there?” On the road, even as teens, with smart phones and Google Maps in hand, my daughters often ask, “How much longer, Dad?”
Unfortunately, there isn’t much I can do to help us reach our destination quicker. I just remind them of the wealth of fun we are all having as a family. Unlike traveling a long and winding road, when creating wealth for yourself, there are alternative routes you can take to get you there quicker. You just have to make certain you create the right road for yourself, and then follow it.
When I started building a five-hole golf course on the property I call The Rocks, I asked Mark Mondo, a friend and pilot, for some advice on how to put in an airstrip as well. Mark obliged and landed his helicopter in the field where I was about to create a dream for myself. In that field, we went on to talk about how we got to the place of realizing our dreams. I explained to Mark that even though I was obtaining a lot of assets, I had a lot of debt to go with it. “It’s stressful,” I confided.
Mark said, “It’s stressful alright, but we have no choice but to take on debt if we want to be rich someday.” I laughed and replied, “You think?”
“Yes, we don’t have time to do this (right) debt free,” he said. “The right way would be to earn money, and with the money we earn, pay as we go, buying equipment and supplies to build our companies. However, that would take 200 years for us to get rich, and we can’t live that long. We only have a 40-year work window to operate in, so we must use the bank’s money to buy the things we need now. Then use those things to generate wealth for ourselves sooner, rather than later.”
Mark confirmed that “using the banks money” was the right way to build my businesses. I neglected to tell him about mistakes I made, and advice I ignored years earlier. My oldest brother, Kelly, told me that I should only borrow money to invest in assets that give me an immediate return on my investment, or I would run out of cash someday. Young and stubborn, I did not listen. In my 20s and early-30s, I chose to buy lots of land on speculation, mostly so my friends and I could hunt.
In the process, I ended up purchasing over 400 acres in several different plots. While business was booming, I could easily make the loan payments. Then (as it always does), business slowed down, and there I was with payments on property that did not generate revenue to carry its own debts. After living through the stress of having to make payments on non-producing assets, 15 years ago, I made a promise to myself that unless I had cash to pay up front, I will no longer buy property that will not generate an instant return for me.
Taking the advice of my brothers, Mark and Kelly, I did still borrow money to buy property. However, I invested in buildings and property that gave me an immediate return upon the purchase. The monthly rental income on the properties is more than the payment, upkeep, taxes and other expenses. This generates me cash, while I pay off the debts.
I also began to pay attention to what borrowing money to purchase equipment does to cash flow. I had borrowed $80,000 for a man lift to clean brick, just because I wanted it, instead of analyzing usage/need we had for it. It sat 75 percent of the time, while I made payments. If I rented one when we needed it, I would have saved us a lot of cash. I am not saying you should not invest in equipment, as I believe equipment is a great investment.
However, you must have enough work to keep a piece of equipment busy 75 percent of the time to justify purchasing over renting. On a large equipment purchase, I also recommend you have a minimum of a one-year backlog to work the equipment you are about to purchase. Using the 75% usage, and one-year need rules, we bought equipment that had payments much lower than our monthly rental rates would be. Hence, the investments have generated cash, while we pay off the debt, eliminating sleepless nights.
Borrowing money is a smart move to gain wealth quicker. Just make sure you borrow for the right stuff. The right investments will give you an immediate return on the money you borrow or invest. The wrong investments are the ones that sit there draining your bank accounts, while you get no quick return. Get started borrowing and investing now, and take those family vacations as no one lives for 200 years.
About the Author
Damian Lang is a mason contractor in southeast Ohio and inventor of many labor saving masonry systems and products. Lang has served as the Marketing Committee Chairman for the Mason Contractors Association of America. He is also author of the book Rewarding and Challenging Employees for Profits in Masonry. To network with Damian on contractor tips or tips you have and would like published, contact him at email@example.com or 740-749-3512.