Page 182 - Trump University Commercial Real Estate 101

TRUMP UNIVERSITY COMMERCIAL REAL ESTATE 101

A MATEUR M ISTAKE (C ONTINUED)

A NOTHER A MATEUR M ISTAKE: “D EBT IS BA D; I ONLY
BUY WHEN I CA N PAY ALL CASH.”

Though I admire the spirit of independence in the person who would
make such a statement, that attitude is no way to get rich.
There’s nothing wrong with debt if it is used prudently. If you’re
truly worried about foreclosure, then scale back the debt, but don’t
eliminate it entirely. After all, you should be only getting into deals
that generate signifi cant cash fl ow even after debt service. In that case,
why wouldn’t you want to use other people’s money to magnify your
own profi ts, unless perhaps you have a religious aversion to it?
I was on stage a couple of months ago with Nicole, one of my suc-
cessful students from Maryland. She was describing how she owned
1,100 multi-family units in six different emerging markets across the
United States. I asked her what kind of cash flow she was generating,

and she said, “Dave, sorry, but that’s none of your business—but I will
tell you this much: I just a new commercial building for one million
dollars and I paid all cash.”
She got big applause from the audience, but only a short, polite clap
from me! Sure I’m proud of Nicole, but she’s missing out on a major

opportunity. She can benefit from the profit from one property worth

$1 million, or from three to 10 more, all with her same current assets.
Even professional investors are subject to this mistake. I sat on a
panel at a big real estate convention in Baltimore along with a guy
who bragged that he owned 45 single-family houses with zero debt.
Both he and my student Nicole failed to make one key calculation:
return on equity. They both had nice bank balances, but that equity
was not working hard enough for them.

Cash Flow After Taxes

Return On Equity = ___________________
Cash Invested
Here’s another way to put it: Don’t impress me by your cash fl ow.

Instead, impress me by how much cash flow you generate compared
with how much you invest.
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