What Is Leverage?

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

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

When most people talk about the word leverage, it usually involves talking about 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 among 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. Truth be told, we are all using leverage to benefit us each and every day.

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 cleaning person or 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.

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. 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 principle 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.

If you’re interested in being more like Sally then we need to talk.

 

 

 

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