Leverage

Leverage

What is it?

Using borrowed money to multiply your potential gains.

e.g.

Lets say you are buying a $250K home with a downpayment of 20%. You are putting $50K of your own money and borrowing the remaining $200K from a bank. Since you have actually put in only 1/5th of the purchase price, you have got five to one leverage. Now lets say that the value of the house increases over the next five years to $300K. Given that you have put in only $50K, the additional $50K increase in value means you have effectively doubled your money. That is the power of leverage.

Over the past few years, many homes have doubled in price. Think what this means in terms of leverage. If you invested $50K in a $250K home five years ago, and it is now worth $500K, you have made $250K on a $50K investment. In investment circles, that is called a five-bagger - an amazing 500% return on your money.