Do you want to accelerate your path to financial freedom? If so, you need to know about the power of leverage and how it applies to investing. Leverage is amplifying the power of your money, time and knowledge.
To illustrate this, let’s make a comparison between investing in the sharemarket using no leverage, and investing in positive cash flow real estate using leverage.
The difference is because the banks won’t normally lend to invest in the sharemarket, but will often lend 80% or more to enable you to purchase real estate.
Sharemarket: $100,000 invested is $100.000 of your own money in shares.
Returns- if the return is 5% your return is just that; 5% on your own money
Property: $100,000 invested, but $80,000 (80%) is borrowed and you put in only $20,000 of your own money.
Returns- 5% return on $100,000 invested = $5000. As only $20,000 of your own money was invested this is a 25% return on your own money.
Using the above figures, the return on your money invested in property (using leverage), is five times greater than the return on your money invested in the sharemarket (no leverage)!
Caution: with any leveraged/geared investment your gains can be increased, but so can your losses. Ensure your property is cash flow positive i.e creates you a profit before tax when all expenses, including borrowings, are included.
There are other types of leverage you might want to utilise. You can leverge your time by getting a good property manager and you can leverage your knowledge by using people who have already done it.
Read Robert Kiyosaki’s book “Retire Young, Retire Rich.” It’s all about leverage.
Disclaimer: this is not intended to be financial advice and is for guidance only. If you are interested in using leverage please consult a professional.