Quite simply, leverage 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 lift the car and change the tire. This is leverage.
When most people talk about the word leverage, it often involves 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 discussion topic amongst us Canadians.
If you own a home, you’ve already leveraged someone else’s money, and you’ve probably done very well off that investment. So why stop there? Why not continue that pattern? Perhaps the word leverage scares people. Truth be told, however, we all use leverage to benefit us every day. Here are just a few:
- Technology: Using your cell phone allows you to take your office and emails with you. You leverage the technology to work on the go.
- Other people’s time: Hiring a cleaning person or a mechanic to change your oil. You leveraging their time so you can save yours.
- Other people’s knowledge: hiring an accountant, lawyer, mortgage broker, etc. You leverage their knowledge to protect yourself and so 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’s no point in learning by trial and error what someone else has already learned and that they can teach you.
Leverage is the key to many areas of success in our lives.
To create any kind of wealth in this world, you’ll need to leverage other people’s money, time, and knowledge. We love leverage in real estate: for every $1 I have, someone’s willing to give me $4. And I then use that $5 to buy real estate. Here’s an example:
- John uses $100,000 to buy stocks/RRSP/mutual funds.
- Sally uses $100,000 as a down payment, which allows her to buy a $500,000 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 $100,000 is worth $207,000. That’s $107,000 in profit.
- Sally’s property is worth $1,000,000. Her $400,000 mortgage has been paid down to $200,000. If she sold her property (and recoups the cost of the original $100,000 down payment), she’d have $700,000 in profit.
Sally’s $700,000 can then go towards paying off her principal residence, sending her kids to college with no debt, early retirement, and so on. Sally is the obvious winner over John when it comes to how to leverage your money.
If you’re interested in being more like Sally, we need to talk.