What is Leverage?
Learning how to use leverage is a powerful tool to increase net worth. Leverage is using a loan to purchase an income producing asset.
Not all loans are equal. Residential, commercial, and hard money are types of loans you can use as leverage to grow your net worth.
Leverage is for those who have a very good credit score, are not in consumer debt, have invested in their tax advantaged accounts, and now would like to diversify their income and invest in an income producing asset.
Before using leverage to increase your net worth, make sure you do not over leverage yourself – this is crucial.
Example – Real Estate
Examples of types of income producing assets include small businesses and real estate.
I know the most about real estate so that is what I will focus on.
Typically, investment real estate requires a 25% down payment. However, I have seen some lenders go as low as 10%, but this is extraordinarily rare. A 10% down payment on an investment property would require an exceptional credit score and significant cash reserves.
Beware of Over-Leverage
A 10% down payment may sound great and super achievable but, tread lightly. You do not want to over leverage yourself. Why do you ask?
Well, in the age of COVID-19, mass amounts of people were laid off, States stopped all evictions, tenants could not pay their living expenses. But you are still responsible for all repairs, maintenance, taxes, mortgage, interest, and insurance on the property.
If you do not pay, your credit score will decrease significantly. If you decide to go into forbearance, forget purchasing another property for the foreseeable future.
A higher down payment means lower monthly payments. You will be able to weather the storm a little easier with lower monthly payments if your tenants don’t pay.
Leverage is a very powerful tool to be used responsibly. If you are thinking of using leverage to purchase an income producing asset put in the time and research or you could end up losing a lot of money.