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Leverage – The $1 Million Dollar Question

Leverage. If you are interested in home ownership or financial products, you have probably heard this word tossed around.  

It’s one word with several meanings, so you may not have a solid grasp on the concept. That’s why I want to talk to you about it today!

So what is leverage?

Quite simply, it is the ability to do more with less.

For example: If you wanted to change a tire on your car, you wouldn’t be able to lift the vehicle on its own. However, with the help of a car jack, you could then lift the car and change the tire. This is called leverage.

When people like me talk about the word leverage, it usually doesn’t involve cars, but it does involve real estate.   

This then starts a conversation around risk tolerance, market conditions, home values, and everyone seems to have an opinion – real estate is a very popular topic amongst us Canadians!

If you own a home then you have already leveraged someone else’s money and I’m sure you’ve done very well off that investment. So why stop there? Why not continue that pattern?

I think it’s because the word leverage scares people- but we shouldn’t be scared of it! Truth be told, we are all using leverage to benefit us each and every day. Leverage is the key to many areas of success in our lives. In order to create any kind of wealth in this world, you will need to leverage other people’s money, time, and knowledge. For example:

·         Technology – using your cell phone allows you to take your office and emails with you. You are leveraging the technology to allow you to do your work on the go. 

·         Other People’s Time – hiring  a mechanic to change your oil. You are leveraging their time so you can save yours.

·         Other People’s Knowledge – hiring an accountant, lawyer, mortgage broker, etc. You are leveraging their knowledge so you are protected and you don’t have to waste time figuring it out yourself.

·         Education – taking a course, going to school, reading a book, attending a seminar. There is no point in learning by trial and error what someone else has already learned and they can teach you. 

I love leverage in real estate because for every $1 I have, someone is willing to give me $4. And I then use that $5 to buy real estate. Here is an example:

John uses $100k to buy Stocks/RRSP/Mutual Funds.

Sally uses $100k as a down payment which allows her to buy a $500k investment property.

15 years later…

Let’s assume an annual rate of return of 5% for both (No matter what number we use here, the theory is the same). 

John’s $100k is worth $207k = $107k profit.

Sally’s property is worth $1M, $400k mortgage paid down to $200k, payback the original $100k down payment = $700k profit. This $700k can then go towards paying off Sally’s principal residence, sending her kids to college with no debt, early retirement, etc.

It’s obvious Sally is the clear winner over John when it comes to how to leverage your money.

We should all be like Sally, if you know what I mean, and if you’re interested in being more like Sally then we need to talk! Let’s talk about how you can leverage your current assets to reach your financial and life goals.

And while you are at it, make sure that you check out…

My VIP Club!

Instead of traditional advertising, every month I am giving away something fun to my VIP’s (past, present, and future clients); you’re one of them! There’s no catch – I’m spending my advertising dollars on you. I’ll be sending mortgage news, keeping in touch, and offering you a cool giveaway.  http://eepurl.com/g2-tNf

Have a fabulous day!

Christina Pentlichuk