You can multiply your returns using leveraged investments

BY CLEVE DeSOUZA

One way to kick-start your 2021 portfolio is to consider using a leverage strategy.

Simply put, leverage means borrowing money in order to generate a higher rate of returns on investment. The most common example of a leveraged real estate investment is when you use a mortgage not only to acquire the property, but also to multiply the returns on the down payment you made.

Think of leverage like you are using a long stick to move a BIG BOULDER up a hill rather than trying to push it with your bare hands. The stick leverages your strength so you can do more with less. Essentially leverage creates a multiplying effect.

Here’s how leverage works with finances:
When you bought your home, you most likely gave the bank a deposit of 15% to 20%. The bank financed the rest of your purchase price. If you did your homework and bought a home in the right neighbourhood, it’s worth more today than it was when you bought it. That means you leveraged the bank’s money to invest in your future. If you sold the house now, you could pay off your mortgage and pocket the difference between the selling price and what you owe the bank.

Say you paid cash for the house and it appreciated 5% each year. That 5% is your return on investment. However, had you leveraged the purchase you could have made more. With a 4 to1 leverage, your return on investment would be 20% to 25%.

But what if economic hardship hits and you bought a property that didn’t gain value? Ultimately the lender would take the property to recover the loan. The lender could charge you fees with no regard for what this did to your finances. That’s why borrowing to invest requires careful consideration and risk management.

Real estate investing is not the only type of asset that allows leverage. You can also leverage to buy stocks or for Forex trading. You simply borrow money and then invest it to multiply your return. If you can borrow money without a down payment, then your returns are infinite, even though zero down loans are rare these days.

So, what stops most of us from getting access and exploiting leveraged investments? It is the lack of financial education and fear of the unknown. Consider this, though. Banks leverage your money every day. When you deposit money in the bank, the institution invests it. They pay you 0.05% (or less) interest while the bank makes 30% on its loans and investments.

As with any investment, do your homework to make sure you know what you’re getting into. Get the professional help you require and be smart with your hard-earned money. I can tell you not all professionals act in your best interest, so pick them wisely.