The Power of Leveraging

The concept of exchanging “Time for Money” is really limiting. There is that much we can do with our 24-hour, so we will have to look for other ways and means to add to our income, to achieve the goal we have set for ourselves to create wealth.

If we can find a way to leverage our time and effort our goals will be achieved faster and easier.

The dictionary explains the word “Leverage” as the mechanical advantage of a lever. Lever, an old French word means “to make lighter” and…………….Leverage in financial dictionary means - “Use of borrowed funds to increase purchasing power and, ideally, to increase the profitability of an investment.”

Illusion6

Scenario:

If Investor A wishes to invest in real estate. The property costs $100,000 and produces Net Operating Income of $10,000 per year. If purchased with all cash, Investor A’s annual Rate of Return is 10% ($10,000 ˜ $100,000). If she leverages the investment by borrowing $75,000, her return on equity may be higher. If the debt cost is 8% ($6,000) annually, the leverage results in a return of 16% ($4,000 ˜ $25,000). However, if the debt cost is 12% ($9,000), the leverage is negative because it reduces the return on equity to 4% ($1,000 ˜ $25,000).

 

A simple analysis:

1. Do not wait until you have that $100,000 ready in cash to buy a property. Leverage by getting a good deal from the bank to finance your purchase.

2. If you have $100,000 liquid cash, put them in different investment e.g. $25,000 in a property, $25,000 in mutual fund, $25,000 in share market, $25,000 in the bank for emergency purpose if you do not have this done yet. (this is just an example, your decision to invest will very largely depend on the market situation and your risk level)

This entry was posted in Invest Terms. Bookmark the permalink.

One Response to The Power of Leveraging

  1. web site says:

    Thank you for every other fantastic post. Where
    else may just anybody get that kind of information in such an ideal means
    of writing? I have a presentation next week, and I
    am at the search for such info.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>