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Monday, January 10, 2011
Financial Leverage--Your Road to Wealth
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Use the smallest investment to control the maximum amount of property.
In this article I am using real estate to demonstrate the way to financial success and wealth using financial leverage. Many wealthy people have used other people's money to become very rich. In just the simplest terms here is the path that has been followed to attain money.
Using "other people's money" boils down to three simple concepts in accumulating real estate wealth. (This advise was given many years ago by the great humorist, Will Rogers.}
1. Find out where people are going.....people make price.
2. Get there first
3. Buy up parcels of land
In real estate the principle has always been:
Location--Location--Location
Where people will find services, transportation, necessary amenities for life, not in a swamp or environmental hazard area. These factors will provide the safest investment.
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Financial Leverage...The Keys to Financial Freedom
Take the smallest amount of money to control the largest value in a real estate investment. Take a duplex valued at $100,000. {This low figure is for demostration purposes, of course property values tend higher.} if it is purchased with 10% down, that 10% is the financial leverage used to control not the $10,000, but 10 times as much, the whole $100,000.
The use of another person's money is the borrowing of the balance, either through a contract of sale or mortgage on the property. In this example 90% of the value is on loan or using another person's money.
Rental Income could well pay for the property, possibly furnish some cash flow at the same time. So What! Having renters buy a property is just the smallest benefit. Building up equity is not the end of the story.
INFLATION, and the APPRECIATION in property value provides the real wealth. Owning the property for only 10 years at the average inflation rate of 5% per year is not unrealistic. Purchasing in a good growth location will produce much more and at the end of a 10 year period check how much the property will be worth.
***Be fully aware in the recent break down of the major banking structures through wild investment schemes and other factors, real estate has and can depreciate, go down in value. However over the long periods of time this is a rare, very rare incident.***
Financial Leverage, the secret to wealth, using borrowed money to control the resource, in this case real estate, while the value soars. At 5% appreciation at the end of ten years your $10,000 original investment has grown five times. The investment is now worth $150,000 plus from the value of $100,000 controlled at the time of purchase.
The big secret to financial leverage is the small original investment used to control the largest amount of value. Other benefits accrue at the same time such as cash flow and equity build up, just more frosting on the cake.
No puzzle, no mystery...just using money plus time...and the correct pick of investments of course. Once again we can't expect much growth in the value if the real estate is a swamp or hazard waste dump.
You could turn this example to the stock market, buying stock on loans or margins and picking companies that are fixed to grow and increase in value.
The lesson is to take the smallest effort to multiply and expand your resource. In another article we can see how to use this principle on Internet applications to profit quickly and with less outlay. How to capitalize on other factors to multiple efforts and make more income.
•Notes & Warning....real estate as well as the stock market have been know to take dips but over time they have always come back and increased in value. This is not giving you financial or tax advice, but a simplified explanation. Each Individual must seek professional advice for their own situation.
•You don't have to be a tax attorney or an accountant to realize the government is subsidizing your real estate ownership by allowing certain business expenses such as taxes, insurance, mortgage interest deductions and depreciation during property ownership..
•Warning to understand the full federal and state government tax benefits a good tax attorney or accountant is necessary. Better be safe and well informed now, than sorry later.
This is a rewritten article that was originally published March 2009. At that time the US Government was offering "First-time home buyers tax credits". This article is revised. How to use Financial Leverage to Build Wealth | Original click here
Fact: Real Estate has turned more regular people into millionaires than Any Other Industry! Fact: Anybody can create freedom and wealth through real estate.
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All material herein © 2010-2011 "Harvey Akeson Tucson Calling" Reprint rights by permission: harvey@harveyakeson.com