Give me a lever long enough....

“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” Archimedes

Leverage is the key to growing your wealth. You will rarely hear the financial pundits talk about leverage, you will find it in some books. Leverage is the great equalizer. This is not about buying consumer goods on credit to enrich one’s lifestyle. Leverage should be applied to investment assets.

Inflation is the old age of money. Like many of us, not as functional as we once were. It would be easy to take the analogy to far, so I will stop here! Inflation creates the savers dilemma. I can get 1.25% on my savings account and inflation over the long term is 2%. The will lose .75% of its value every year. In this scenario It would make sense to spend the money today rather than, save it as the value shrinks. It would be a fair statement that RE would also increase in value by 2%. If your goal is to stay even, then you do not need leverage. Your property and the rent will increase with inflation, over the long term. The market will gyrate up and down in any given year, long term prices can only go up so quickly. The underlying factor is household income. If the average worker cannot afford the average home, there is an imbalance that will eventually be corrected. If your goal is to outperform inflation, then you need leverage.

The US government uses this concept to lower the net amount they owe at the cost of the saver. If the government borrows money from you at 1% and inflation is at 2%. The net effect is they will pay you back less than they borrowed. The goal is to follow the Fed and since they are shrinking how much they owe through the difference in borrowing, so should you. This is accomplished by long term borrowing.

The second reason for using leverage is you can control more RE. By itself owning RE is unimportant. Controlling it is valuable. What if I offered a deal where I let you do whatever you wanted with a property? All I want in return is when you finally sell it, give me back what I originally paid for it, nothing more. You can decide when you want to sell or rent it and for how much. This is the ultimate scenario for leverage. I have no money in the project, but get all the reward. This is control, not ownership. In this case I have all my money available to invest in other projects. Unfortunately, this is not a common scenario. The next best option is to borrow the money.

I often hear people say I would never pay that high an interest rate. It is just a number. If that is your only way to gain leverage, especially when starting out, then it is not high. Losing out entirely is an even higher cost.