Are you doing everything right financially, but you feel like you’re just not growing? Are you wondering how the rich are able to accumulate money so quickly, while you struggle and sacrifice to make ends meet?
The reason why most folks take years and often decades to generate any real wealth is because they don’t understand the incredible power of leverage.
Now you might be asking what is leverage?
In short, it is using debt or other people’s money to buy assets that you would not be able to buy on your own. But I think leverage is actually even broader than that. It includes using other people’s time, expertise and efforts to accomplish things you cannot do on your own. More on that later.
In this article, I am going to discuss why leverage is a radical difference maker and share with you three powerful ways to use leverage to skyrocket your wealth in a short period of time.
Let’s get into it!
If you would like to see a condensed version of this article in video format, check out my YouTube video on the topic below.
Number 1: Using Leverage in Real Estate Investing
If you want to use leverage for long term investing, one of the best strategies to do that is investing in real estate. Real estate is often viewed as an ideal long-term investment, so pairing it with a low-cost, long term debt obligation, like a 30 year mortgage, provides a potent combination of amplified returns and long term stability.
Here’s a a story to illustrate the point.
Ken and Kimberly are siblings who have each inherited $20,000 from their grandmother. Ken invests his $20,000 in the stock market and makes 10% each year on his investment. At the end of 10 years, his investment is worth $51,874.
He’s more than doubled his money, so not bad.
But Kimberly took a different approach.
She used her $20,000 as a down payment on a rental property worth $100,000 at a 6% interest rate. To minimize her monthly payments, she opted for a 30 year fixed rate mortgage.
She then rented it out for $1,000 per month, which gave her around $300 in cash flow each month after paying for her mortgage, taxes, insurance and so on. Assuming a very modest 3% appreciation rate, can you guess how much she had at the end of 10 years?
The answer is $103,344!
Let’s soak that in – she multiplied her money more than 5 times and wound up with around double the wealth that Ken had.
What was the difference? Ken bought an asset worth $20,000. Kimberly bought an asset worth five times that amount. Even though they started with the same amount of money, she used leverage to buy a much bigger asset and thus had much greater earning potential.
This is a simple example of the power of leverage and I used real estate as my first strategy because I think it’s one of the most tried and true strategies for building wealth over time.
Related Reading: If you want to learn how to start investing in rental properties, check out my step-by step beginner’s guide on how to do this here.
Now, there are more exotic real estate investing strategies, like lease options (where you can potentially control a rental property for only 1% to 3% of its value. So in the example above, Kim would have been able to control that same $100,000 property for an option fee of around $1,000 to $3,000.
To learn more about that, check out my article on sandwich lease options here.
If you have some experience in finding deals and managing real estate already, you can even begin to do real estate syndication, where you use other people’s money to buy high priced real estate, like apartments and commercial properties, with only a relatively small investment on your part.
But if you don’t want to deal with tenants, repairs, and the like, there are other ways to use leverage to amplify your returns. On that note, let’s move on to strategy number 2…
Number 2: Using Leverage in Stocks
If stocks are more your game, there is plenty of opportunity to use leverage there as well.
The most obvious example is by using a margin account.
This is basically a line of credit that is associated with your brokerage account. You must apply for this type of account and get approved, but once you are, you can tap into that line of credit to buy more stocks than your cash balance would otherwise allow.
So if you have $4,000 to invest and you get a margin account that allows you to buy $8,000 worth of securities, then if that $8,000 investment goes up by 10%, you have actually made a 20% return.
But it cuts the other way too.
If your $8,000 investment goes down by 10%, you have experienced a 20% loss. And if the value of the security goes down quickly and dramatically, you may experience a margin call, which could result in the broker selling your stock without your permission, which would lock in your loss.
This is really high risk stuff and not for the faint of heart.
Another way to leverage stocks is to buy options.
When you buy an option you are not buying the actual stock. You are instead buying what is called a derivative, which basically gives the option holder the opportunity to buy or sell the underlying stock at a given price.
The cost to buy an option is often much less than the cost of buy the underlying stock. We are often talking pennies on the dollar.
But there is, of course, a rub.
Options expire, so if you do not exercise your right within the designated time period because your bet did not pan out, it will expire worthless.
Here’s an example of how it works. ABC corporation is trading at $50 per share. You think it’s going to go up to $60 per share over the next month, so you buy a $50 call option which allows you to buy 100 shares of ABC stock at $50, with an expiration date that is at least two months out. If the cost of the option is $10 per share, then you have paid $1,000 for the opportunity to control 100 shares worth a total of $5,000.
If the stock goes up to $60 per share within that timeframe and you exercise the option, you could pocket $1,000 in profit, which equals a 100% return on your investment. Compare that with if you had just used your $1,000 to buy the stock outright.
You would have only owned 20 shares. A move to $60 per share would have netted you $200 vs. the $1,000 you would have made using options.
That being said, like with margin trading, options can be extremely high risk.
For example, if ABC stock did not move in the direction you expected within the expiration date, the entire $1,000 investment would be gone. In short, you need to have really deep conviction in your options trade and be willing to lose the entire investment if you want to do this type of investing.
A third way to use leverage to enhance your stock market returns is by investing in leveraged ETFs.
These types of funds allow an investor to go long or short on a particular index and reward the investor if they chose correctly.
For example, if you believed that the S&P was going to go up and wanted to take maximum advantage if that happened, you could buy shares of a leveraged S&P 500 ETF which would magnify your profits if the S&P rose.
So instead of making a 10% return if the S&P rose by that amount, you might make 20% or even 30% instead (depending on how leveraged the ETF was).
But you would also take outsized losses if the S&P fell. Like with options, you need to have strong conviction and a high tolerance for risk to invest in these types of funds.
There are some notable examples of using leverage in the context of securities investing, but there are even more exotic options out there.
For example, if you want to trade commodities on FOREX, you can potentially gain access to 50 times leverage (in the U.S.). That’s crazy!
In addition, if you are a high net worth individual, you can also access hedge funds. which are notorious for using leverage to juice their returns.
Number 3: Leverage Other People
The final leverage strategy I want to discuss is a bit different.
As I mentioned at the top of the article, you can leverage people to help you boost your wealth. A simple example is a business owner who hires a much needed employee or consultant to help him grow their business.
If you hire a marketing expert and pay them $1,000 to grow your sales, and the marketing campaign they produce generates extra profits of $2.000, that’s a perfect example of using leverage to make money you otherwise would have missed out on.
This type of leverage can be incredibly powerful and can generate returns that blow away the returns from any other use of leverage. It’s why Fortune 100 companies will pay millions of dollars to recruit top talent.
But you don’t always have to shell out big money to take advantage of this type of leverage.
Some of the best ways I have leveraged other people did not involve me paying them anything. When I started investing in real estate and when I started my online businesses, I did extensive research online on how to get started.
There were plenty of videos, articles and other resources written by experts in the field that I read for absolutely free. Getting access to their advice, experiences, and lessons gave me a huge boost when I launched my own online businesses and really positioned me for success.
It’s easy to forget that prior to the internet, this type of information was just locked up inside the brains of people who had the specialized experience.
There really wasn’t an easy way for them to share it with the mass public. Now, it’s there for the taking. I would urge you to invest the time and effort to find it, soak it in, and use that information to jump start your journey to financial success.
After all, it just takes one great idea that you would have otherwise never considered to change the entire trajectory of your financial life. I would say that’s an investment worth making every time.
On that note, if you want to learn about some unique money-making ideas that you probably have not heard of before, check out these two popular articles that I wrote on the topic.
So there you have it – 3 ways you can use leverage to generate extraordinary financial results.
If you want to learn more about how to generate passive income, check out my ultimate beginner’s guide to passive income, with over 25 passive income ideas you can explore.