Leverage can be your pathway to wealth. You just don't know it yet. 

Leverage is a powerful tool for building wealth, but it can also be a giant burden if mismanaged. While leverage can be applied to various asset classes, property investing is the best example of how this financial technique can accelerate wealth accumulation. In this article, we will explore how leverage is used to build wealth.

"Leverage is the key to unlocking exponential growth and wealth creation. It's about doing more with less and maximising the impact of your resources." - Grant Cardone

Being in control 

The most important aspect of using leverage is having control over it. If you don't have control, then never use it. Allow me to explain what I mean by having control. 

Property investment with leverage has risks, like uncontrollable interest rate hikes or months without tenants, which can cause losses. You have the control in your hands to find more tenants, sell the property, and control the expenses. In this way, you have control over the leverage by having control over the income and expenses. 

Using leverage in an asset class you have no control over, such as stock market investing, is a dangerous idea. If the stock goes down, you can't tell the board of directors how to manage their income and expenses, which leaves you at the mercy of the market. Always ask yourself when using leverage, Do I have control over the income and expenses? If the answer is no, don’t use leverage.

The Concept of Leverage in Property Investing:

Leverage in property investing involves using borrowed capital, typically in the form of a mortgage, to purchase a property. This type of strategy allows an investor to control a substantial asset with a smaller upfront investment. By using leverage, investors can multiply their returns, as the property's value appreciation benefits the entire investment, not just the initial capital invested. 

Using someone else's money (the banks) to purchase your property, having tenants repay the mortgage and other expenses, having agents doing all the work for you, and inflation eating the debt over time makes property investing one of the best investments. Below are some examples of return on capital invested. 

Example 1: Let's say an investor purchases a property worth R1,500,000 with a 20% down payment (R300,000) and a mortgage loan covering the remaining 80% (R1,200,000). If the property appreciates by 5%, the investor's return would be R75,000 (5% of R1,500,000). However, since the investor only invested R300,000 of their money, the return on their initial investment is 25% (R75,000/R300,000).

Example 2: Consider an investor who acquires a property for R2 million, putting down 30% (R600,000) and financing the remaining 70% (R1,400,000). Suppose the property generates a net rental income of R100,000 per year, representing a 5% yield on the total investment. In this scenario, the investor's return on investment (ROI) is 16.7% (R100,000 / R600,000). This return is significantly higher than the 5% rental yield, thanks to the leverage applied.

In property investing you will have both examples, i.e., capital growth (example 1) and rental income (example 2) in your favour at the same time, making the returns on your investment much higher than the general options available.

Benefits of Leverage in Property Investing:

Increased Potential Returns: As demonstrated by the examples above, leveraging property investments can substantially enhance the returns on an investor's initial capital.

Diversification: Leverage allows investors to diversify their property portfolio by acquiring multiple properties simultaneously or over time, maximising their exposure to potential market gains.

Inflation Hedge: Property investments, especially when leveraged, can act as a hedge against inflation. As property values tend to rise with inflation, the investor's equity increases, leading to potential long-term wealth appreciation.

Downsides of Leverage in Property Investing:

Increased Risk: While leverage can amplify gains, it can also magnify losses. If the property's value declines, the investor's equity is eroded, potentially leading to negative equity if the market downturn is severe.

Higher Debt Burden: Borrowing money to invest in property means taking on debt obligations, including interest payments. If the rental income generated by the property is insufficient to cover these expenses, the investor may face financial strain.

Market Volatility: Property markets can experience periods of volatility, which may impact property values. Investors using leverage should be prepared for potential downturns and have contingency plans in place to weather such periods.

Summary

Leverage can be a powerful tool for building wealth through property investing. By intelligently applying borrowed funds, investors can amplify their returns and accelerate wealth accumulation. 

At Finsights, we want you, the everyday hero, to take control of your finances, become aware of financial independence, grow your knowledge, and let us be your financial independence partner. 

 Onward to Financial Independence