Make your net worth soar without earning a dollar more
Leverage is like a cheetah. It can make your net worth soar to magical new heights. It can also be the fastest way to the poor house.
Leverage is borrowing money to buy an investment. This could get you into the red zone if the deal doesn’t go as planned. So, before you employ leverage’s awesome power, be sure you can calculate the risk.
That being said, my financial position would be a shadow of what it is today if I had not employed leverage. In another blog post I detailed how I made a 1/4 million dollars by turning my house into an asset. In this post I’m going to show you how much of that money was earned because of the use of leverage.
To start with, let’s talk about the cash piece. I bought my apartment for $370,000. My down payment was $74,000. I had to pay the lawyer and other condo fees to close the deal. These costs tallied up to $6,000. My apartment was a fixer upper and I invested $10,000, in cash, over the course of two years for renovations, bringing the total cash invested to $90,000.
$74K down payment + $6K lawyer fee & condo fees + $10K upgrades = $90K cash invested
I leveraged the rest. Yippee! On this investment I used leverage in two ways. First, I got a mortgage for $296,000. This is the most common use of leverage. Second, I utilized my excellent credit score to take out $20,000 on a 15-month interest-free credit card.* This brought my total leveraged position to $316K
$296K mortgage + $20K on a credit card = $316K leveraged
The value of the total investment was $406K
$90K cash invested + $316K leveraged = $406K
So, just how much did I make because I used leverage? My total profit from the deal was: $237,267. To figure out how much of the return came from my cash, and what came from leverage, I simply need to see what percent of the deal was financed with each.
In a nutshell, 22% of the return came from my cash investment.
Total cash investment/ Total investment value
$90,000 / $406,000 = 22%
Allowing me to earn $52,596 from the use of my cash. This is a crazy good return. $52K can easily be a year’s worth of work, but it’s a far cry from a quarter of a million dollars. The bulk of my return came from the leveraged piece. A whopping 78% of my return came from the use of leverage.
Total leveraged amount / Total investment value
$316K / $406K = 78%
Allowing me to earn … drum roll, please: $184,670 from the use of leverage. **
Do you see how valuable this tool can be? It can shave off decades on your quest to build financial freedom. It is actually a magical power tool that makes getting wealthy possible for the masses, like myself, that don’t earn millions from their day job.
If you are one of the many who thinks getting rich is impossible, ask yourself, “Am I making my money work hard for me?” or am I “Working hard for my money?”
You can be as wealthy as you want to be, but you can’t save yourself rich! You can’t work harder to get rich! To get financial bliss you have to learn how to make your money work for you. If you don’t know how to do that? Fear not. I can teach you. And, surprisingly, it’s pretty fun!
* Please do not do this if you have credit card debt, or can not quantify the risks. I knew, before I took the money, that I was only risking $5,000 MAX for the 90% + probability of making $70,000 or more. I will show you how I calculated this risk in a future blog post.
**It’s important to note that because I did this deal with the use of my primary residence all the earnings are tax-free.