Even in default, you can't say that Donald Trump was wrong. All that borrowed money raised him from a status of "simple rich boy" into mogulhood. Saving your pennies is a fine idea. But it takes leverage to levitate into the ranks of the well-to-do.
With leverage, you put up a small amount of cash in order to control a much larger investment. The classic leveraged investment is a home mortgage, which, for most Americans, is the basic wealth-building loan.
Many home-improvement loans also add value. The rule: An improvement makes sense if it adds $2 of value for every $1 you spend.
Ask any mogul: You can get richer, faster, by investing other people's money as well as your own. But loans have to be serviced, and that's where Trump went wrong. He broke most of the rules of prudent real-estate investing and didn't get away with it. Here are those rules, and how you can do it right:
An investment property ought to support itself. If you buy a two-family house, the rents should cover all of the costs plus a cushion for contingencies. Then it won't matter if the value of the property falls temporarily. It still will be paying for itself.
You can risk buying a property that doesn't support itself only if you have plenty of liquidity on the side. A "liquid" investment is one that can be turned into cash at a moment's notice with no loss in value. Money-market accounts are liquid. Stocks are liquid. Real estate isn't, because it usually takes a while to sell. (And to sell fast, you'll probably have to cut the price.)
If you buy a property that costs $2,000 a year to run, after rents, you should have that annual $2,000 already in the bank. In fact, you need more than $2,000, because you might have to carry the property for a month or two in between tenants. You also need enough money to make unexpected repairs. So real-estate investments should always be balanced with ready cash.
If you're buying raw land, you need a tremendous amount of liquidity. Raw land doesn't yield any income. Instead, it eats money, in the form of the real estate taxes you have to pay. You also need liability insurance, in case someone is injured on the property.
The risks in raw-land investing are huge. Maybe the town will rezone it from commercial down to residential, reducing its value. Maybe someone will discover buried oil drums there that will cost a fortune to clean up.
The average investor can't get a loan against raw land. But you might borrow against another piece of property in order to make the purchase. That adds interest payments to an investment that produces no current income.
Don't take on the risks of raw land unless you're wealthy enough to carry the property for many years more than you originally expected, without any risk to your personal finances. John Reed, publisher of the Real Estate Investor's Monthly, says that raw land is not something you own, it's something you flip. Take an option to buy the property, subdivide it, exercise the option and resell immediately to a developer.
When you borrow against your salary, prepare an escape hatch. First, all your monthly payments (including the mortgage) shouldn't top 40 percent of your gross monthly income. Second, determine how you'll meet your loan payments if you lose your job. One fallback: Three months' income in the bank. Another: An open home-equity line of credit that you can use in a pinch.