Episode 6 of the #EverythingMoney show is all about Advanced Debt Management strategies – also known as, Leveraging Debt.
The concept of leverage essentially means to “do more with less.”
In terms of money and finance, one can leverage the use of debt – or credit – instead of using their own cash.
Basics of Leveraging Debt
When you extrapolate this concept, the results can be quite incredible.
For example, you could borrow money from the bank to purchase a house. You could then turn around and rent that house to someone at a rate that’s higher than your monthly mortgage + taxes + insurance.
… Then, after a few months or a year, you can go and get another loan for another house.
You guessed it, you’d do the same thing to that house and collect a rent higher than your expences.
This concept is the “less aggressive” approach of leveraging debt.
Leveraging Debt: Advanced
One of the more aggressive, more advanced forms of leveraging debt starts with a scenario similar to the one above.
You start with borrowing money to buy a house. Let’s say you borrowed $700,000 to buy a house worth $700,000. Then you turned around and sold that house for $600,000 cash.
Then, you took your $600,000 cash and put it as a down payment for a multi-unit property with at least 20 units. You can then take the cashflow that you would get from a 20 unit property, and pay both mortgages.
This is just one advanced example of leveraging debt and is NOT a strategy for beginners. Unless you have a strong mentor or advisor that really knows what they’re doing – or until you’ve established the knowledge base and experience to pull off a move like that – please don’t try this strategy.
Start small… You can leverage debt by using your credit card to pay the start-up costs of a new business, and use sweat equity to accomplish the rest.
You can leverage debt by asking for a loan from a rich relative – especially, if you have bad credit with the banks – to start a new business, buy a property etc., and if your relative is willing to bet on you, then you can pay them the interest of the loan instead of the bank.
Once you’ve established the expertise and the experience to make big moves, then you can comfortably do so without having to worry of losing everything or going bankrupt.