What Is Leverage And How Does It Help You To Build Wealth?

Do you know what leverage is?

If you want to be wealthy and experience the freedom you desire then you need to know what it is and use it to your advantage.

I have been doing this for many years as a property investor.

And you need to use it too in your property investment business.

So what is Leverage?

If you have come across the term “leverage” before you can be forgiven for thinking that this only applies to money. There are in fact a number of different forms of leverage. I will discuss some of these in this post.

The best way to describe leverage is that you can make a lot happen with just a little. Think of a plank of wood being able to move a very heavy object when it is on a pivot. When you use leverage you can make things happen really quickly.

The bottom line is that the more leverage you have the quicker you will become wealthy.

Leverage with Money (using Other People’s Money)

As a successful property investor I use this strategy all of the time. I borrow money from others at a particular rate of interest and then I make a greater return from investing in property.

By using leverage with money you may think that I am just taking on more debt. While this is true I am using this debt to make a gain. It is a smart use of debt. Maxing out your credit cards to buy things that you will never make a return on is not a smart use of debt.

The way that you invest the money that you have available to you will determine how wealthy you will become. Most people do not use their financial leverage in a way that will make them wealthy. They borrow money to buy cars and other things that do not appreciate in value. They do not use a focused leverage strategy to build wealth.

A shrewd property investor never looks at a property and thinks “can I really afford to buy it?” Instead they will think “what is the best way for me to use the leverage at my disposal that will provide me with the best return using this property?”

Some people are just opposed to borrowing money. They believe that saving is the best way to become rich. But in order to become rich from savings you need to have a significant amount of money to start off with. This is not a situation that most people find themselves in.

The thing to remember is that if the total return on an amount that you invest consisting of some of your own money and some money you borrowed) is greater than the interest you are paying on the borrowed amount then you will profit from this.

When you use leverage you will not affect the percentage rate of return. So if you invested £100 at a 15% interest rate you would earn £115. However if you invested £1,000 at the same 15% interest rate you would earn £1,150. I think that you would agree that there is a significant difference between a profit of £15 and £150.

In property investment terms building a buy to let portfolio is a great example of leverage. You purchase your first property by using your own cash as a down payment and borrow the rest. You rent it out at a 10% per year annual return. After a while the equity builds up in this property and you can use this to secure the mortgage on your next buy to let property.

In a few years you have several properties providing you with a significant monthly income and of course you still have the properties as assets. Many property investors do this and create a portfolio fast and build their wealth. The income rental from the properties is higher than the interest on the loans and other costs.

Apart from your initial cash down payment you have used other people’s money or leverage to get to this position. You will build your wealth much faster when you use a smart leverage strategy and property investment is the perfect way to do this.

Let’s take a look at some other forms of leverage:

Other People’s Time

I have said on many occasions that your chances of success in property investment rise significantly when you have the right team supporting you. You only have 24 hours each day and you have to sleep for a number of hours. The only way to get more time is to use other people’s time.

Let’s say that you need to renovate a property that you have recently purchased. If you have the skills to do this yourself then you could do that but is it the best use of your time? In my opinion it certainly isn’t.

While I will need to pay some competent trades people to perform the work for me I free up my time to make even more money. I can focus on my next investment project while other people are spending their time improving one of my assets.

You need to treat your time as the most precious commodity that you have. While you can always make more money it is not possible to get time back. So employ experts to take care of your renovations, accounting, legal and other aspects of your property investment business.

I have my own team of employees that are prospecting all of the time for new opportunities and implementing projects to make significant returns. Yes I have to pay them for their efforts, but I could never do the same amount of business on my own.

When you are just starting out it is often the case that you will have to do a lot of things yourself because you do not have the financial wherewithal to get others to do it for you. This is OK and I started out this way too.

But I always had a plan to leverage other people’s time as soon as I was in a position to do that. Don’t think of using an outsourcer or employing someone as an expense. See this as providing you with even more leverage on your journey to wealth.

Other People’s Knowledge and Experiences

Using other people’s knowledge and experience is another powerful form of leverage. If you think about it you are leveraging my knowledge and experience right now by reading this post.

I would never recommend that you try to make it in property investment on the basis of trial and error. There are so many ways that you can leverage the knowledge and experience of others to be more confident of achieving your goals in the fastest possible time.

One of the best things that I ever did was to get a property investment mentor. This cost me quite a bit and it was a struggle when I first started out but the advice I received was priceless. I can say the same about most of the seminars I have attended and the training courses and books I have purchased on the subject of property investment.

Other People’s Ideas

This is closely related to leveraging other people’s knowledge and experience. An experienced property investor sells you a training course that contains some great income producing ideas. You then use these ideas to build your wealth.

A successful franchise like McDonalds is a good example of leveraging other people’s ideas. You are presented with a time tested and proven idea that will make you a significant return on your investment.

Use Leverage to your Advantage

Now that you understand the power of leverage and how it can make you wealthy faster you need to start using it to your advantage. Start by using other people’s money to build your property portfolio.

leverage by Mike Cohen

Then you can move on to leveraging other people’s time by employing people to uncover new opportunities for you and implement them. Be committed to leveraging other people’s knowledge and experience all of the time.

Harvey Raybould

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