10% of the borrowers in the world use debt to get richer – 90% use debt to get poorer – Robert Kiyosaki
I used to fear mortgages, now I welcome them to my portfolio.
It’s very hard to build wealth without leverage, unless you’re sitting on a lot of cash, and I’d still argue that mortgages are a great tool to utilize. Why is that?
It’s because you as an individual have limited resources, mainly time and money. If you are a high-income earner, you might argue that you make enough money at your job to fund all your real estate investing needs. That may be true, and if your goal is to have 5 houses paid off in 30 years, that might work for you.
But if your goal is to have 30 houses, or 20k of income every month coming from your rental properties, chances are it will take you a long time to reach that goal. And Time is the key factor here, because you can always go out and make more money, but time is always ticking away, for everyone.
For the non high-income earners, once you spend your money, you have to either wait to build up enough money to buy another property, or you can use other people’s money in the form of leverage. You’ll find out that there’s an unlimited amount of money out there that you can access. You can grow your portfolio exponentially when using leverage, creating more time.
Leverage cuts both ways
Remember that leverage cuts both ways, meaning, it will help you when times are good, and can hurt you when times are bad, depending on how you use it. *When I say leverage or debt, I’m not talking about credit cards, I’m talking about bank financing to buy real estate.
For example, when a house increases from 100k to 110k, and you initially put down 20%, your property just went up by 10k, and that profit is all yours. You still owe 80k on your loan, but the bank doesn’t come to you and ask for their percentage of that gain, it’s all yours.
Now this is a paper gain, meaning that it doesn’t put actual money in your pocket, but your property is worth more than it was last year. You can realize this gain by taking equity out of the property, which I’ll speak more about later.
Let’s say your property goes down in value, using the same numbers as above. Your 100k house decreased in value by 10%, making it worth 90k now. You still owe 80k on the property, but on paper, you just lost 10k because the market went down, something that you can’t control.
If it went down by 30% or 30k, then you’d be underwater in your property and you can see how leverage cuts both ways, both in good times and in bad. This is just something to be aware of since this did happen to many people during the crash of 2008.
Think like an Economist!
Understanding leverage and how important it can be, is one of the foundations of real estate investing that is crucial to becoming a smart and successful investor. I often find myself learning and researching more about ways to finance a deal, than the deal itself, because the financing is the most important aspect of the deal.
Why do you think economists, financial strategists, and businessmen are invested heavily in real estate? Because they understand leverage, creative financing, and the real estate is just the vehicle allowing them to create their success. Financing and debt are what our economy is based on, and the people that know how to use it in their favor, are the ones who are successful in investing, not just real estate investing either.
Have you used leverage to creatively put together a deal? If so, please share your story below so we can all learn and comment.