I’d like to explain what it means to ‘leverage credit’? I’m sure you’ve heard of the acronym OPM, Other People’s Money and have likely wondered what it really means to invest with OPM.
Well, it can mean a couple of things, it can mean utilizing venture capital for investment purposes, but it can also mean leveraging capital from lenders with the money you already have. To give you more of an idea of what I’m talking about, I’ll walk you through two opposite examples.
Let’s say you have $100,000 and you find a house for sale for that same amount and decide to purchase it, whether it be to live in or rent as an investment property.
This would mean that you have not leveraged any money and have utilized all of your own capital.
Now, on the other hand, let’s say you buy the same house but you only use 20% which is $20,000 and leverage the other 80% from the bank. By leveraging 80% of the cost of the property, you still have $80,000 dollars left in your pocket and so you could purchase another 4 $100,000 houses with 20% down payment for each one.
This means that by leveraging the banks’ money (OPM) you could purchase $500,000 of real estate with your $100,000 essentially leveraging $400,000. If you rent each property out and at the very least cover your costs, your tenants would be paying down the mortgages on all of the properties for you, and over time your assets will be paid off, once again using OPM, Other People’s Money.
This is one reason, why I, invest in real estate.