You know those comic books where the superhero swoops down to save the lady buried by the avalanche? He rips a telephone pole from the ground, pries off the 10 ton boulder and saves the day. Wouldn’t it be great to have the amazing ability to lift huge obstacles like that, especially those that bury your ability to build wealth?
Humans have had this ability, since around 260 BC (think of Archimedes).
Thanks to a simple tool – the lever. Take an ordinary board, over a simple fulcrum, apply pressure and soon you’re lifting bricks, stones, oxen, boulders from ditches, you name it.
And that same kind of tool is available for investors. A tool that gives you superpowers to lift your earnings to great proportions. That tool? Leveraged debt.
Just like a physical lever lets you lift and move amazing weights, financial leverage provides the exponential strength your private lending business needs: diversification, investment in multiple properties, magnified returns.
How do you do that? You first need to understand the immense power you’ll be wielding with financial leverage.
Getting to know your leverage tool belt
Superpowers are awesome. Yet, every hero has a toolbelt to enhance their core powers. The private lender is no different. Their tool belt has 3 types of weapons-grade financial leverage at their disposal:
Positive Leverage – when the investment return increases as a result of the debt financing. Because of the use of leverage, the return is greater than if it would not have been used.
Neutral Leverage – when the investment return does not change as a result of the debt financing. The use of leverage does not have an effect on the return.
Negative leverage – when the investment return decreases as a result of the debt financing. Because of the use of leverage, the return is less than if it had not been used.
To illustrate, think of purchasing a brand new bat cave, with all the appropriate (and expensive) bat gizmos. Having that bat cave enables you to prevent all kinds of crime in Gotham City and consequently earn money for the crimefighters pension fund. Taking an 80% mortgage would be the financial leverage tool to make that happen.
So what type of leverage did you just attach to your dream cave?
If your return is, say 6% with the loan versus 5% without the loan, we’re looking at positive leverage.
If the return is 5% with the loan versus 5% without the loan, we’re looking at neutral leverage.
If the return is 4% with the loan versus 5% without the loan, we’re looking at negative leverage.
Some leverage is kryptonite to your financial health
You know that famous superhero saying: With great power comes great responsibility? While your leverage superpower can be very powerful, there are times when it’s just better to keep your glasses on and not let them see that cool superhero costume under your business suit…
When the situation indicates positive leverage, this superpower is at its strongest: your cash flow increases, your business abilities grow, break out the cape and fly.
Similarly, when the situation indicates neutral or negative leverage, you’ll get more done walking than flying. It’s time to keep that cape tucked away.
Yet there are times when the speed of that superpower works for you, even in negative or neutral situations. For example, if you need to swoop down and quickly buy and sell a house, you’d rather use the speed that negative leverage gives you than not. Because you are not keeping the house, that kryptonite negativity has no effect. That superhero speed and power enables you to lift that house and flip it.
But wait… don’t I want to be debt free?!
It’s normal to question the use of your superpowers. Even web slingers mope around wondering why they couldn’t just be like everyone else – until it’s time to really see what that power can bring!
It’s natural to be wary of debt. It’s something we’ve been taught that mature people do. Pay off the credit cards! Stay away from car financing when you can! That sort of thing.
But when it comes to building wealth, debt is not necessarily bad. Debt used as positive leverage, is positively crucial to business growth.
Consider the following:
You see terrific, continuing, passive income potential in a multi-unit property in an up and coming neighborhood. Your current resources do not enable a straight cash purchase. But a loan could make that purchase happen. The return from the rental income would be far greater than the payment costs of that loan, and it would only improve over time.
Should you embrace that positive leverage? Positively. Throw off that mild mannered disguise and let your leverage-based superhero powers shine.
Harness the superpower of financial leverage
When you understand the risks and benefits of financial leverage, you’ll see that it can serve as a tremendously powerful wealth building tool. Positive leverage, where your investment return increases due to debt, and even neutral and negative leverage can be hugely effective in your efforts to grow financially.
Don’t be afraid of your leverage superpowers. Despite what you’ve heard growing up, debt can act as a lever to lift financial boulders and provide great benefits for your business and those people you care about. Use that superhero power to help your wealth building power soar!