Wednesday, May 25, 2022

Last week Twitter blew up with tweets about Elon Musk’s hostile offer to buy the company for $44 billion. According to the Bloomberg Billionaires Index, Musk is the world’s richest person, with a current net worth of $257 billion. Musk tweeted: “Free speech is the bedrock of a functioning democracy, and Twitter is the digital town square where matters vital to the future of humanity are debated.” I was fascinated by this story and how everything unfolded between Musk and the board of Twitter.

However, what intrigued me most was that while Musk initially offered to buy the company “all cash,” very soon after, it was disclosed that Musk would be taking out loans to secure the acquisition. (Does this sound familiar to any of you realtors and sellers?!) In a public filing a few days after the accepted offer, Musk said he had secured $46.5 billion in financing – mostly with borrowed money.

It’s clear that Musk knows something that I have been preaching for years – using financing in a prudent manner is very worthwhile. Perhaps he or his advisors have been reading my articles, as it has been the real purpose in why I began writing these articles in the first place. Helping people understand how using financial leverage to help acquire assets and real estate is something the wealthy have been doing for ages.

A great example of this is McDonald’s. No matter where your travels take you in the world, you will likely find a McDonald’s outlet. As of 2020, the company was operating almost 40,000 restaurants worldwide and is recognized as one of the world’s largest restaurant companies. In the 1950s, McDonald’s was running a very efficient franchise business, making its primary revenue from royalties, franchise fees, and a small percentage from the actual sale of food. That said, what if I told you that selling burgers is not the real business of the McDonald’s corporation. “Real Estate” is the primary asset of McDonald’s!

In 1959, Harry J. Sonneborn, a Jew born in Evansville, Indiana, became the first president and chief executive of McDonald’s after he approached the owners with a novel concept to help them ‘really get rich.’ Through Sonneborns newly formed McDonald’s Real Estate Corporation, the company acquired properties at long-term fixed interest rates and leased them out to its franchise partners for hefty rents.

This arrangement, now popularly known as the Sonneborn model, helped the company scale aggressively with massive profit margins. McDonald’s present-day real estate holdings represent over $40 billion on its balance sheet - about 99% of the company’s assets. McDonald’s is ranked as the 7th largest real estate company in the world!

There are many successful individuals who are making “a very nice living” with their careers. The issue is that they are the driving force of their income. Absent their continued involvement and efforts, their take-home pay would not sustain itself. Many self-employed proprietors don’t own any tangible assets and have significantly more “sweat equity” than business equity – with no real assets. Conversely, if people stop eating burgers tomorrow, McDonald’s is still supported by its massive real estate empire.

Using financing can substantially expand a person’s income and net worth. The Federal Reserve just raised rates 50 basis points (half of one percent) in an attempt to curb rampant inflation. Mortgage rates have more than doubled since the lows we experienced last year. Yet, despite these worrisome headlines, the affluent continue to use financing and leverage their money to help them build real wealth and achieve financial freedom.

Special shout out and birthday wishes to Aryeh Baer, Stacey Barach, Leah Escott, Igor Genkin, Haim Gozali, Yehuda Kaminer, Elisheva Nunberg, Eric Orgen, Jesse Rosenblatt, Nomi Schneck, Nati Schreiber, Jackie Stromer – and special birthday wishes to Dovid Shayowitz.

Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected]

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