Investing word of the day: Leverage
Hi it’s been quite awhile since I posted some investing words to think about.
So lets start with LEVERAGE.
as margin, to increase the potential return of an investment.
2. The amount of debt used to finance a firm’s assets. A firm with
significantly more debt than equity is considered to be highly
Leverage is most commonly used in real estate transactions through the use of mortgages to purchase a home.
So basically what does this word mean to us?
Well leverage is taking advantage of available means to increase profit. To make it simple let’s use OPM(Other People’s Money).
For example since Christmas season is around let say you wanted to sell those beautiful parols but right now you don’t have enough capital to buy such. So you decided to find the manufacturer to make sure you get it at the cheapest price. So you went to Pampanga and was able to find the manufacturer.
But even though its cheap at the manufacturer you still don’t have enough capital of your own so you ask your brothers and sisters to lend you money. And so you got the money and got the parols. Displayed the parols in your house which is along the busiest road in your subdivision and by week’s end you sold all the parols.
So where is leverage there? That is where OPM(Other People’s Money) come. Well you were able to make profit even without you shelling out cash to finance your purchase.
By that you were able to increase you earnings by 100% if you fully financed it with borrowed money.
The same principle is used in Larry Gamboa‘s book Think Rich Pinoy(an adaptation to Robert Kiyosaki‘s principles in the Philippine setting).
Larry and his partners scout banks for foreclosed properties that are auctioned at insanely low price. With a required deposit of only Php 25,000.00( this is the minimum I think) they were able to join the auction of foreclosed properties and the bank will even let you pay the property at installment basis.
So Larry Gamboa and company are able to leverage on their buy and sell project because it seems that they didn’t even empty their pockets to fund the project because they borrowed the fund they need to the same bank who sold the property.