Property Launches & Investments

This is some blog description about this site

  • Home
    Home This is where you can find all the blog posts throughout the site.
  • Categories
    Categories Displays a list of categories from this blog.
  • Tags
    Tags Displays a list of tags that has been used in the blog.
  • Bloggers
    Bloggers Search for your favorite blogger from this site.
  • Team Blogs
    Team Blogs Find your favorite team blogs here.
  • Login

The Power of Leverage: Three Reasons to Use Assets as Collateral

Posted by on in Property News
  • Font size: Larger Smaller
  • Hits: 1419
  • 0 Comments
  • Subscribe to this entry
  • Print

Last week we asked if your assets passed the leverage test. And perhaps you wondered to yourself, “But why would I WANT to leverage my assets or use them as collateral? Don’t I want them to be “free and clear”?

The Myth of “Free and Clear”

The myth of “free and clear” is that if you are debt-free, you are maximizing your money by avoiding paying interest. But is that how the wealthy of the world operate?! Consider the following…

  • Do wildly successful business people typically start companies in which they refuse to seek capital in the form of business loans or stock, content to grow them slowly without the help of ANY outside dollars?
  • Do people become successful real estate investors by saving up money to buy each rental house “free and clear”?
  • Do the rich of the world keep their money in a liquid/cash state so they have access to all of their money if necessary, or do they put their money to work, generating new wealth?

The wealthy borrow against – or leverage – their own assets as a standard rule of practice. They do it wisely and cautiously, but with an appreciation for how leverage can multiply their profits and allow them to control more assets than simply their cash.

The Power of Leveraging Your Assets

Leverage helps increase the VELOCITY or “movement” of dollars through your asset. It also helps your dollars do more than one job, and when you multiply the JOBS your dollars do, you’re using strategies that tend to multiply your DOLLARS as well.

Here are three reasons you may WANT to leverage your assets to increase the velocity of your dollars.

1. The ability to leverage or use assets as collateral gives you financial flexibility.

Without financial flexibility, many investors tend to divide up their money in ways that make it inefficient, inaccessible, or both. They try to fund an emergency account, a 401(k), an IRA, an HSA, a 529, plus disability, life, and long-term insurance, perhaps even pay off a credit card to boot. The result? They end up with “too many accounts with not enough money."

Having ample savings gives you safety, security, and the ability to respond to opportunities as well as emergencies. But who can afford to have 6, 9, or 12 months of living expenses parked in a savings account earning next-to-nothing?

Having savings or assets that you can easily leverage if needed means that you won’t have to repeatedly deplete your savings account – or worse, your credit limit – when you need cash. Instead, you can keep your assets working for you, and use them to provide your own financing for that new vehicle, rental property down payment, or college tuition.

2. Leverage can increase cash flow.

The ability to leverage assets can make an investment opportunity possible, or it can even make a good investment better. As Truth Concepts software’s Todd Langford explains in this real estate calculator tutorial based on a real-life example, leveraging the cash value in a life insurance policy might make a lot of sense when acquiring a cash-flowing rental property, provided that the cash flow is adequate.

Of course, another commonly leveraged asset is real estate itself. And while the mantra taught by many financial gurus is to “pay off your mortgage as soon as possible,” we can see from the following hypothetical example (compliments of Kate Phillips of Total Wealth Coasching  and calculators from true concepts software) how paying off your mortgage can actually slow wealth-building down. If your goal is growth and cash-flow, it may make sense to leverage. Let’s see how a mortgage might affect investment real estate from a wealth-building perspective:

Example 1: You have $20k cash flow each year (after taxes, insurance and maintenance) on a property that you own outright. The property is worth $200,000, and your $20k cash represents a 10% annual rate of return on that asset.

Example 2: You bought the same $200k property with 20% down ($40k), borrowed the other 80% ($160k). and earned only $10k cash flow per year due to the mortgage payment.

Your cash flow is half of the first scenario, in which you own the real estate outright, but your ROI is actually much higher with the mortgage. Why is that? Because now you are earning $10k with only $40k of your own money invested. The other $160k comes from the mortgage. Earning $10k on your $40k investment represents a 25% annual return!

Real-estate-ROI-3-compared-w-mortgage

3. Leverage can expand your total assets.

Let’s take this hypothetical example further. If your intention is to invest $200k into real estate, you could buy one property, as our first example above. But let’s suppose you could buy 5 similar cash-flowing properties with 20% down, or $40k each, you would now have 5 properties earning $10k per year, or a total of $50k.

Your rate of return would still be 25%, as in our second example above, but instead of controlling one $200k asset, you’d be controlling FIVE $200k assets, or one million dollars in assets – with the same $200k investment!

Yes, you’d also have five times the work, if you were managing the properties yourself! But you would have five times the cash flow as well. And at the end of 30 years (supposing a 30 year mortgage), you’d own five houses free and clear. And at a modest appreciation rate of 4% over 30 years, those five homes could now be worth more than 3.2 million dollars!

Real-estate-future-value

Contrast that to simply owning ONE house free and clear at the end of 30 years (worth less than $650,000), or even investing the whole $200k in account growing at 7% (totalling just over $1.5 million – without taxation OR 30 years of cash flow), and you can start to really understand the power of leverage.

The ability to leverage is the reason studies consistently show a shocking difference between the net worth of homeowners and renters. Even when home prices were still recovering in 2010, according to a Consumer Fiances report published by the Federal Reserve in 2012, the average total financial assets of renters totaled only $12,600 vs. $296,200 for homeowners, a differential of more than 2,300%!

Like the chicken vs. the egg, one might argue which came first – home ownership or a certain level of wealth, but an analysis of various categories proves to be compelling. There was a larger gap in net worth between homeowners and renters than between those of different education levels, locations, race, even types of occupation. Theonly factor that appeared to be equally or more powerful than home ownership in terms of growing wealth, statistically-speaking, was age.

Caution: A Warning about Over-Leveraging Assets

Just as leverage can make a good investment better, be aware that it makes a bad investment worse! If you did own five rental properties, you would want plenty of access to cash for occasional big-ticket items such as a new roof or tenants-gone-wild. (This is why investment real estate and whole life cash value can be so synergistic

Even with a well-maintained rental, if you over-leverage real estate so that it no longer cash flows (perhaps counting on appreciation to make it a good investment), you may find that you have an unsustainable or even worthless investment if the winds change. In 2008-2009 when the real estate market took a sudden downturn, many foreclosures resulted from such speculation.

Similarly, if you under-capitalize a business or leverage against your stocks to purchase more stocks and there is a severe decline, you will magnify your losses, potentially even losing more than you started with.

However, just because leveraging your assets must be done carefully doesn’t mean that it shouldn’t be done! (That would be like saying we shouldn’t use furnaces, heaters, or wood-burning stoves because they can burn down a house.) No, we must exercise caution by paying attention to cash flow and not speculating on returns.

Should You Consider Using Your Assets as Collateral?

Borrowing against your assets, whether a home, a business, a life insurance policy, or any other asset should be done with care. The wealthy put their dollars to work, and they also tend to maintain positions of relative liquidity that they can tap into as needed for major purchases, emergencies, and new investment opportunities generating reliable returns.

The bottom line is clear for those with ears to hear: leverage is a simple yet powerful strategy that you neglect at the peril of your own wealth.

Rate this blog entry:
3

Comments

  • No comments made yet. Be the first to submit a comment

Leave your comment

Guest Monday, 13 January 2025
District 1
Marina Bay Condo | Shenton Way Commercial | Marina Bayfront Condo | Central Boulevard Condo | Central Boulevard Towers | Marina View | V on Shenton | Marina South Pier Condo | Marina One Residences | Shenton Way Condo |
District 2
Pearl Bank En Bloc | Outram Park MRT Condo | Silat Residences | Avenue South Residence | Sky Everton | Sky Everton Freehold Condo Prices | Outram Road Condo | One Pearl Bank | Excellent Connectivity from One Pearl Bank | One Pearl Bank Design and Layouts | Pearl Bank Apartments | Asia Gardens | Anson Road Condo | Tanjong Pagar Condo | Tanjong Pagar Commercial | Greater Southern Waterfront | Wallich Residence | Tanjong Pagar Centre |
District 3
Queenstown Condo | Queens Peak Condo | Dundee Road Condo | Margaret Ville | Margaret Drive Condo | Alexandra View Condo | Prince Charles Crescent Condo | Rest of Central Region Condo | Principal Garden | Silat Avenue Condo | Jalan Bukit Merah Condo | Kampong Bahru Road Condo | Stirling Road Condo | Stirling Residences | Commonwealth Avenue Condo | The Crest @ Prince Charles Crescent | Commonwealth Towers | Highline Residences | Alex Residences |
District 4
Corals at Keppel Bay | Skyline Residences | Reflections at Keppel Bay |
District 5
Park West Condominium En-Bloc | West Coast Vale Condo | Park West Condominium | Parc Clematis | Parc Riviera | The Trilinq | Bijou | West Coast Way Condo | One Normanton Park | Normanton Park Condo | Clementi Avenue 1 Condo | Jalan Lempeng Condo |
District 7
CityGate Condo | Selegie Road Condo | Sophia Road Condo | Tan Quee Lan Street Condo | The M | Middle Road Condo | South Beach Residences | Duo Residences | Beach Road Bugis Rochor Condo | Midtown Suite | Midtown Bay | Midtown Bay Floor Plans and Facilities | Beach Road Commercial | Golden Mile Complex | Textile Centre | Golden Mile Complex En Bloc | Textile Centre En Bloc | The Oasis |
District 8
Peace Centre Mansions En Bloc | Perumal Road Condo | Northumberland Road Condo | Uptown at Farrer | 1953 Condo | LYF | Tessensohn Residence |
District 9
Cairnhill Mansions En Bloc | Orchard Bel-Air En-Bloc | Pacific Mansions En Bloc | Robertson Quay Condo | Paterson Road Condo | Cavenagh Gardens En-Bloc | Cavenagh Gardens | Cavenagh Road Condo | Orchard Boulevard Road Condo | Orchard Road Condo | Scotts Road Condo | Cairnhill Road Condo | Riviera Point | The Iveria | The Iveria Condo Floor Plans | Cairnhill Mansions | One Tree Hill | River Valley Road Condo | Martin Place Condo | Martin Modern | Kim Seng Road Condo | Handy Road Condo | Haus on Handy | Jiak Kim Street Condo | Riviere Condo | Fraser Residence Promenade | Avenir Condo | Pacific Mansions | Great World MRT Station Condo | Martin Place Residences | The Rise at Oxley Residences | Orchard Paterson Cairnhill Road Condo | Core Central Region Condo | Robertson Quay Condo | Paterson Collection | St Thomas Walk | Leonie Hill Road Condo | Horizon Towers | Leonie Gardens | New Futura | Cairnhill Nine | 3 Orchard by the Park | Twin Peaks |
District 10
Grange Road Condo | Farrer Road Condo | Tulip Gardens En Bloc | Tulip Garden Residences | Leedon Green | Leedon Green Floor Plans | Tulip Garden Residences Floor Plans | Tulip Garden | Tanglin Road Condo | Jervois Gardens | Crystal Towers | Juniper Hill Condo by AllGreen Properties | Juniper Hill | The Hyde at Balmoral | The Hyde | Balmoral Road Condo | Jervois Road Condo | Petit Jervois | Jervois Prive Exclusive Condo | Jervois Prive | Jervois Treasures Condo Floor Plans | Jervois Treasures | Tanglin Shopping Centre En Bloc | Tanglin Shopping Centre | Jervois Gardens En Bloc | Spring Grove En Bloc | Spring Grove | Hallmark Residences | Wilshire Residences | Sloane Residences | Ewe Boon Road Condo | Bukit Timah Road Condo | Bukit Timah Collection | Cluny Park Residence | Cuscaden Road Condo | Petit Cuscaden | Cuscaden Reserve | Cuscaden Reserve Condo Floor Plans | Boulevard 88 | Pollen and Bleu | Leedon Residence | Gramercy Park | Ardmore Three 3 | Sculptura Ardmore | RV Residences | Robin Residences | 18 Nouvel@ Anderson Road | Holland Road Condo | The Estoril | The Estoril En Bloc | Hollandia En Bloc | Hyll at Holland | Hollandia | TwentyOne Angullia Park | D'Leedon | Mon Jervois | Holland Village Residences | One Holland Village | One Holland Village A Mixed Development Design | Holland Village Condo | Van Holland | Van Holland Floor Plans | 15 Holland Hill | 15 Holland Hill Floor Plans |
District 11
Chancery Court En Bloc | Chancery Court Condo | Thomson Road Condo | Novena Condo | Newton Road Condo | Pullman Residences | Pullman Residences Floor Plans | Dunearn Road Condo | 386 Dunearn | Dunearn Court Condo | Derby Court | Fyve Derbyshire | Derbyshire Road Condo | Kampong Java Road |
District 12
Balestier Road Condo | Toa Payoh Condo | Neem Tree | Riverbay | Boon Teck Towers | Eight Riversuites | Boon Teck Towers En Bloc | Gem Residences | Kallang Riverside Condo |
District 13
Woodleigh Residences | Upper Serangoon Road Condo | Park Colonial | Woodleigh Lane Condo | Mattar Residences | Woodleigh MRT Condo | Woodleigh Condo | Woodleigh Link Condo | Bidadari New Estate Condo | Upper Aljunied Road Condo | Tre Ver | Raintree Gardens | Potong Pasir Avenue 1 Condo | Potong Pasir Condo | The Maisons | The Quinn | Mattar Road Condo | The Poiz Residences | The Venue Residences | Sant Ritz |
District 14
Eunos Condo | Eunos MRT Condo | Sims Avenue Condo | Changi Road Condo | Parc Esta | Eunosville | Eunosville En Bloc | City Plaza | City Plaza En Bloc | Paya Lebar Road Condo | Sims Drive Condo | Park Place Residences | Paya Lebar Quarters | Sims Avenue Condo | Paya Lebar Central |
District 15
Dunman Road Condo | Coastline Residences | Amber Sea | One Meyer | Albracca | Siglap MRT Station Condo | Marine Parade Road Condo | Casa Meyfort Condo | Meyer Mansion Floor Plans | Meyer Mansion | Meyer Modern | Nanak Mansions | Meyerhouse Exclusive Condominium | Meyerhouse | Meyerbank | Nyon | Rebirth of Amber Park Condo | Amber Park Condo Seafront Living | Amber Park | The Opus | Parkway Mansion | Amber Park En Bloc | Hawaii Tower En Bloc | Parkway Mansion En Bloc | Albracca En Bloc | Laguna Park | Laguna Park En Bloc | Tanjong Katong MRT Station Condo | Meyer Road Condo | Hawaii Tower | Katong Park MRT Condo | Katong Park Residences | Katong Park Towers | Amber Gardens Condo | Amber Road Condo | Neptune Court | Neptune Court En Bloc | Lagoon View | Lagoon View En Bloc | East Coast Marine Parade Condo | Katong Shopping Centre | Katong Shopping Centre En Bloc | Mountbatten Road Condo |
District 16
Siglap Road Condo | Mandarin Gardens | Mandarin Gardens En Bloc | New Upper Changi Road Condo | The Glades | Bedok South Condo |
District 17
The Inflora |
District 18
Tampines Court | Treasure at Tampines | Tampines Court En Bloc | Tampines Street 11 Condo | Tampines Avenue 10 Condo | Coco Palms |
District 19
Florence Regency En-Bloc | Florence Residences Condo Club | Florence Regency | Rio Casa | Kensington Park En-Bloc | Kensington Park | Serangoon Ville | Serangoon Ville En Bloc | Forestwood Residences | Hougang Avenue 2 Condo | Hougang Central Condo | Hougang Condo | Riverfront Residences | Hougang Avenue 7 Condo | Affinity | Serangoon North Avenue 1 Condo | The Garden Residences | New Condo | Serangoon Gardens Condo | Serangoon Central Condo | Lorong Lew Lian Condo | Riverbank Sengkang West Way Condominium | Yio Chu Kang Road Condo | Toho Green | Rivertrees Residences | Parc Botannia | Fernvale Road Condo | High Park Residences | Sengkang West Condo | New Tampines Road Condo | Kingsford Waterbay | Botanique at Bartley | Buangkok Condo | Buangkok MRT Station Condo | Sengkang Central Condo | Sengkang Grand Residences | Sengkang Central Residences | Sengkang Central Residences Floor Plans | Sengkang Grand Residences Floor Plans | Sengkang Central Residences Prices | Sengkang Grand Residences Prices |
District 20
Marymount Road Condo | Braddell View En Bloc | Lentor Hill Road Condo | Lentor Central Condo | Braddell View | Shunfu Road Condo | Jade Scape | Far Horizon Gardens | Far Horizon Gardens En Bloc | Ang Mo Kio Avenue 9 Condo | Faber Gardens | New Lorong Puntong Condo | Thomson Impressions Condo | Adana | Panorama | Upper Thomson Road Condo | Yio Chu Kang Road Condo | Lentor Road Condo | Caldecott Condo | Bishan Central Condo | Lentor Drive Condo |
District 21
Jalan Anak Bukit Condo | Beauty World Condo | Goh & Goh Building En Bloc | Pine Grove | Pine Grove Condo | Pandan Valley Condo | Ridgewood Condo | Ridgewood Condo En Bloc | Mayfair Collection | Mayfair Gardens Condo | Mayfair Modern | King Albert Park MRT Station Condo | Mount Sinai Condo | Ulu Pandan Road Condo | Pine Grove En Bloc |
District 22
Jurong Condo | Lake Grande Condo | Lakeville | J Gateway |
District 23
Toh Tuck Road Condo | Kismis View | Dairy Farm Road Condo | Dairy Farm Residences | Dairy Farm Residences Floor Plans | Foresque Residences | The Lanai | Hillion Residences | Bukit Batok Condo | Hillview Rise Condo | Dairy Farm Residences Prices |
District 25
Woodlands Square Condo | Woodlands Square Commercial | Woodlands Central Condo |
District 26
Springside Road Condo |
District 27
NorthPark Residences | Canberra Drive Condo Sembawang | Canberra Link Condo Sembawang | New Yishun Ave 4 Condo | The Wisteria | Condominium Yishun Central | Symphony Suites | Yishun Avenue 9 Condo | Sembawang Road Condo |
District 28
Jalan Kandis Condo | Kandis Residence |
Executive Condo
Parc Life EC | Choa Chu Kang Drive EC | Sol Acres EC | The Vales EC | Tampines Avenue 10 EC | Tampines Street 62 EC | Fernvale Lane EC | Tampines EC | Signature at Yishun | Choa Chu Kang Grove EC | Bukit Batok EC | Tengah EC | Choa Chu Kang Avenue 5 EC | Woodlands Avenue 12 EC | Sembawang Avenue EC | The Visionaire | New EC at Canberra Link | Canberra Link EC Sembawang | Parc Canberra | Yishun Avenue 9 EC | Yishun Street 51 EC | The Criterion EC Yishun | Yio Chu Kang Road EC | New EC | Serangoon North EC | Yishun Avenue 1 EC | The Terrace EC Punggol | The Amore EC Punggol | Westwood Residences EC | Anchorvale Lane EC Sengkang | Sungei Punggol Reservoir EC Sengkang | Anchorvale Street EC Sengkang | Ola EC | Ola EC Prices and Floor Plans | Westwood Avenue EC | Choa Chu Kang Way EC | Canberra Drive EC Sembawang | BrownStone EC | Choa Chu Kang EC | LakeLife EC Jurong | Jurong EC Jurong | Punggol Drive EC Punggol | Woodlands Avenue 5 EC Woodlands | Parc Canberra Floor Plans | Sumang Walk EC Punggol | Piermont Grand | Piermont Grand EC Prices | Punggol Central EC Punggol |
sss