Leverage is simply the ability to do more with less. Leverage of money means that you could either take your $100,000 and buy a building for $100,000 or take your $100,000 and buy a building for $1,000,000 while getting a loan for the other 90 percent or $900,000.
Now, let’s assume that you have a choice of buying these two buildings in an area that you are confident will have an appreciation of 5 per-cent. Of course, no one can guarantee that kind of results. But we do know that the average property appreciation in the United States is over 6 percent, so 5 percent is actually conservative. At any rate, let’s continue the example. The $100,000 building will go up in value 5 percent for a total value of $105,000. Congratulations, your $100,000 investment has just made a 5 percent return—the difference between the $105,000 value and the $100,000 original purchase price.
Now let’s look at the million-dollar property. The property went up in value 5 percent as well. That means it is now worth $1,050,000. This time, I can really say “Congratulations!” Your $100,000 investment earned a 50 percent return or $50,000, which is the difference between the $1,050,000 and the $1,000,000 original purchase price.
Tags: money