The key to creating great wealth is to use financial leverage, right? You’ve probably heard it a hundred times before. In order to make a greater amount of money at a higher rate you have to use “other people’s money.” By using financial leverage, you create the ability to have more purchasing power and get your money back out of investments faster so you can take advantage of other opportunities that come your way.
Financial leverage, in its simplest definition, is simply using borrowed money in order to purchase assets. Those on the fast track to wealth building understand that by using loan products and tools that are available to them, they can use debt in a way that gives them great advantages.
This may be in the form of borrowing money from the bank or from a private lender in order to have a win-win situation. Here’s how:
- You find a $1 million piece of commercial property that is well run, in great shape and is full of tenants that have 5 – 10 years remaining on their lease.
- You could buy the piece of real estate with cash, but then all of your money would be tied up in this one investment.
- Instead, you obtain a commercial real estate loan that to purchase the property that only requires a $200,000 down payment.
- As a result, the bank earns a nice 6% interest on the loan, you earn $2,000 monthly cash flow from the rental income.
- You now have a remaining $80,000 in cash to use for other investment opportunities.
- In two years you are able to refinance the loan on your real estate purchase, which allows you to pull your original $20,000 out of the investment and still earn the $2,000 a month cash flow. Now you own the property entirely with other people’s money (OPM) and can repeat the process to purchase more income producing investments.
Take the same scenario with a person that has no cash on hand, but has found this great investment opportunity. You, the investor, could approach a private lender and come to an agreement to partner on the investment. They become the money person to help the real estate transaction go through, and you manage the details.
Since you handle all the work and they only provide the money, you split earnings 50/50. As a result, you become part owner of a great income producing piece of property with zero out of pocket expenses, and the private lender earns a great return on their investment without having to actively manage the deal.
Using financial leverage is an integral part to accelerating the amount of wealth you can produce. It gives you the ability to buy more with less and use your money in more ways than one. When you find a potential win-win situation that allows you to take advantage of OPM, you tap into one of the greatest wealth producing tools that exist.
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try proofreading