Strategy: Leverage—tool of the rich.
I talk about the Wealth Wheel: Education, Cash Flow, Growth, Big Hits, Leverage, Taxes and Asset Protection. A key element to the Wealth Wheel is Leverage. The ability to take something small (capital, opportunity, energy or intellect) and leverage the item, into a huge result.
Leverage is an important element to wealth, and even success. Taking limited resources and using them to capacity. Whether in business, real estate, the stock market or life, this is a philosophy and strategy you should master. Let me give you some real life examples, of how to apply this tool to various areas in building wealth.
Strategy: Stock Market Leverage
Options can be great leverage in the stock market. If you know, what you are doing. Otherwise they can just be a waste of money. Ensure you get a strong education on options, before investing.
If the price of XYZ stock is $ 50 a share, we might be able to buy the option for $ 5 a share. Options are usually sold a “contract” which represents 100 share of stock. We buy a 100 share at a time (1 contract). Obviously, I can buy a lot more for $ 5 bucks vs. $ 50 dollars per share. Therefore, return on investment is larger (leverage). Plus I can start with a small investment.
Now many new option investors will buy options that expire in less than 30 days. What they do not realize is the value of the option will decay fast. In fact the greatest decay (loss of value), is in the last 30 days. What that means, is if you are buying options they should be 60 to 90 days minimum. So, we see changes in value based on the market place, not the decay.
There are other examples of leverage in the stock market such as: credit spreads, naked position, and margin (loans).
Strategy: Real Estate Leverage
Five major leverage areas for real estate are creative financing, forced appreciation, negotiation, buying right, and loans.
Any time you borrow money to buy an asset, you can end up with great leverage, provided the asset appreciation is solid. Example: I buy a 100k house, put 10k down, and borrow 90k. It appreciated 5% per year (or 5k a year). Well, my growth is based on the 100k or 5% (5k). But I only invested 10k down. So my cash on cash return is 50%. Borrowing money (at a reasonable rate) with a solid return can be awesome leverage. Might be the reason more millionaires are made in real estate than any other vehicle.
Creative finance is another area in real estate to increase leverage. If you can use a strategy to buy a house with less than $ 1000, you have great leverage. Perhaps use: seller financing, lease with option to buy, or a contract for deed strategy. Each can have a low down payment or investment.
There are other ways to increase real estate leverage like: negotiation of equity or price, balloon payments or deferral of payments, OPM (Other People’s Money) such as PPO (Private Placement Offer).
Strategy: Business Leverage
The quickest and cheapest form of business leverage now-a-days is the Internet. For a few hundred dollars, you can have a store front earning you thousands of dollars every year. The internet can often better than a franchise, or distributorship investment. In many cases, you do not need a product, as you can readily find them as an Amazon affiliate or one of a dozen other programs.
Other forms of business leverage can include:
MLM. Building a down line of individuals, where you get a residual income can be considered leverage.
Building a Business. A standalone business, which you build and don’t manage, is great leverage. Build it and walk away.
Going Public. I took a small company; reverse merged into a reporting shell, and then went public. The shares came out at $ 3.25 a share, and had over a million shares. Major leverage of time, and resources.
Perceived Value. Getting or creating value for limited cost. I sold a tax product for years. We gave a way “audit” protection, when we did taxes for folks. The perceived value was hundreds if not thousands of dollars in value, if you got audited. We also, knew that less than 1% of the population was audited. We received great perceived value, for a very low cost or liability.
Brand. The goodwill associated with a brand, can be millions. I recall having coffee with George Ross (Trumps right hand man at the time), and him saying if the trump name is attached the minimum value was 5 Million dollars in “brand value”.
Strategy: Intellectual Leverage
Intellectual leverage is one of my favorite types of leverage. Using “smarts” to make the most of a situation or opportunity and cashing in on the process. There are dozens of strategies, but number one on my list would be joint ventures.
Joint Venture. Find a database then find a product that the database needs, match up the two and take a percentage of the deal. Example: I found a group of ex-IRS agents that offered services and a product. I knew a financial group that had over 200k members. The end result, we sold over 14 million dollars of tax products to the financial database over 3 plus years. I had a 2.5% royalty on the deal. All parties were happy. I love Intellectual leverage!
Information Products. Decades ago, Ken Blanchard taught me a strategy: make money while you sleep. Write a book, record an audio, or video. And sell it on line or off line. I have sold over 30,000 self-study manuals. The sales were done through 3rd party individuals or companies. I received a small royalty on the sale of each product. Now I sell informational product on line. Great leverage.
Leverage is a key to success in life, business, and wealth building.