Oh hello and welcome to money rosa quick and dirty tests for richer life today's topic is leverage. This is one of my favorite financial topics and here's why leverage can turn an ordinary income in savings into real well it's the key behind the fortune's of many millionaires. So what is leverage and how can you use it to take control of your financial future. Leverage means using a lever it's the power to live something really heavy with a small effort when it comes to money it means using borrowed money and a relatively small initial investment to control a much larger asset. So what types of investments allow you to use leverage well real estate is one of them it's possible to invest in a home using um very high degree of leverage r o p m other people's money. This means that over the long term you get the benefit of appreciation on the value of the house but most of the money use to buy it is the lenders not yours this is one of the biggest benefits of investing in real estate. For short term investors however it's also one of the biggest rescue. Although home price appreciation has slowed nationally over the long term real estate is appreciated about five to six percent per year on average in the u s. Now this return may not sound like anything to write home about but the power of leverage cannot really magnifying. Let's look at a simple example. Imagine you buy a house for one hundred thousand dollars and put twenty thousand dollars down that's five the one leverage. If the house appreciates five percent in the first year you burn five thousand dollars on your twenty thousand dollar investment from the appreciation that's a twenty five percent return not accounting for closing costs. It's impressive return. If you put only ten thousand dollars down that is if you use ten to one leverage instead you're retired from the appreciation double to fifty percent now that's an amazing return. This example is very simple to illustrate the point it doesn't account for net rental income if the house we're rented assuming the house were rented and generated a positive cash flow the returns would be even better. Simply put leverage can create millionaire return. With leverage you can create wealth much more quickly than you could if you paid all cash for property. If you bought the same one hundred thousand dollar house for all cache your return based solely on that five percent appreciation would be of course five percent. By putting ten percent down instead the return is boosted ten times to fifty percent. You know u s it's not unusual to put as little as ten percent down with the letter financing the remaining ninety percent even on a house purchased as an investment. With stocks the highest leverage you can get is typically fifty percent which means you can buy stocks it half their price with a brokerage house applying the rest of the phones. You think borrowed money to purchase stocks it's called buying on margin but you've got to be really careful it can be very risky. With stocks you can get a margin call if the stock falls below a certain amount. A margin call means the brokerage house can demand that you deposit more money or securities into your account to cover specified amount of the cost of the stocks bought with borrowed money a margin call can force you to sell the stock at a very bad time. With real estate there is no margin call if the value drops for a period either to an amount lower than the balance on the mortgage but wonder doesn't call alone and expect you to suddenly pay it back this is a good thing. Using leverage to purchase real estate can magnifier return but it's really important to remember that it can magnifying losses as well. If you put ten percent down on the house and the house drops ten percent and value on paper you've lost your entire down payment. And when you factor in say six percent in realtor commissions a drop of only four percent would erase your down payment if you were to sell. But if you hold for the long term did downside risk of using leverage when buying real estate is reduced a lot since in the u. s. real estate has appreciated over the long term an l paste inflation. No money girl wishes she had known a little more about the power of leverage when she bought her first house. I put twenty percent down. How they put ten percent down instead my monthly payments would have been higher but i wish had the remaining ten percent cache to cover that incremental additional payment for many years with money left over to invest in something else. The power of leverage is the reason that real estate wisely purchased and held for the long term can be a powerful strategy to build well so. This week we have a book give away here is how it works if you send me an email or post it to the block in the money girl section of queue to you know dot com you're automatically entered in the book give away. And this week the winner is amber p congratulations amber please check your email for instructions. You've won investing in real estate by andrew mclean and gary l dread an excellent book on real estate investing with a great explanation of the concept of leverage. Judging that's all for now courtesy of money going on your guys who were richer life if you have a question or comment you can call it in six two zero six money zero one for email it to money at cuny now dot com also check out the other you know i have grammar girl history matters and the travelling on the side thanks for listening
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