There is a reason why learning to invest is one of the ultimate skill sets you can acquire to create generational wealth.
However, many people think of investing as only a single dimension.
This is one of the most important article you will read, and I discovered this after my interactions with multi-millionaires.
How Different People Buy Properties
Robert Kiyosaki put this quite aptly.
Leverage is the reason why some people become rich and others do not get rich.
Let me illustrate an example using Mr. Rich and Mr. Leverage.
Let's say we are buying a $500K investment property in 2020.
- Mr Rich pays full cash for the property.
- Mr Leverage, borrows $350K as an interest-only loan from the bank and pays the downpayment of $150K.
Fast forward to 2025: the property appreciate to $750K. Here are the projected profits.
The green bars represents the profits made on the property. From the above, we can see that:
- Mr Rich made a total of $350K. ($200K from capital appreciation and $100K from rental income.)
- Mr Leverage made a total of only $250K*.
*For Mr Leverage's case, we assume that there is no rental income as all rental income is used to pay for the loan interest.
On first glance, it would seem that Mr Rich has made more money. However, we need to examine further from an R.O.I perspective.
From the above, it is clear that Mr Leverage has made better us of his money, and able to compound it much quickly than Mr Rich.
Education Debunks Risks
"Gin, this is not right! Leverage is risky!"
For those who are like me, with the traditional Asian upbringing - you were probably taught that having debt is bad.
Well - we have to put things into perspective.
If you took a loan, to buy a Ferrari. Yes, this is a bad debt.
However, if you are taking a loan, to buy an asset to make more money - this is called a good debt.
The challenging part here is the asset you have selected to take a loan.
This is where education comes into play.
This is why I invested heavily in my education - to be able to make better decisions.
Once you have acquired the skill set to make money (for example, picking the right properties in this example) - leverage is simply the rocket booster to building your wealth.
How The Stock Market Comes Into Play
For my readers, you would know that I am heavily invested into the stock market.
In fact, my brokerage account is as good as my bank account.
Now, imagine this.
Let's say I am confident to make at least 10% per annum and I have a property worth $1M.
I could use the property as collateral and borrow $100K from the bank at 4% (for example) - and invest in the stock market for 10%.
This is also known as interest arbitrage - and I am basically making 6% of $100K from the money that I don't even own in the first place.
Take a moment to digest that - and you will understand why the rich keeps getting richer.
Always remember - focus on your skill sets, polish them, perfect them. Once that is done, leverage is simply a booster to skyrocket your wealth.
If You Like This Content, You Might Enjoy This
Become an option seller and discover how to extract cash flow from the stock market even if you are starting with limited capital