Hey everyone, and welcome to another wise money tools video. As you know the last few videos, we've been talking about the five elements to wealth. We're gonna finish it up with the fifth one today. Remember our equation y=a(1=r)x. Well, today we're gonna talk about that the power of x. Just as a quick review, a is our cash. Remember, we got to pay ourselves first one is the capital or the debt equation. And how much can we have our money actually growing? Or I should say, how much money can we have growing? Our is the growth factor. Now remember this, there's a plus or a minus, depending on the safety or the risk that you're taking and then x. That's the leverage. This is the exponential growth we get by using leverage. Okay, so let's talk just a second about what leverage is. Leverage goes hand in hand typically with debt, you may hear that, you know, businesses have leveraged a building or a piece of equipment or some sort of asset.


As we discussed are in the earlier videos, there's good debt and there's bad debt. Now, I know there's some people who say, you should have no debt ever, ever, ever. And, you know, that's okay. I can live with that. But oftentimes, there's a way to use debt and leverage that can help enhance your overall return. So just as there's good and bad debt, there's also good and bad leverage. The vast majority of businesses have used leverage in some fashion to grow their businesses. A real estate investor, as an example is gonna use leverage to build their their rental portfolio. Let's talk about a specific use of leverage. Suppose I have $200,000 in cash, maybe I inherited a few bucks I've been or I've been saving it for years and years. And I've got $200,000. And I'm interested in real estate, specifically rental properties. Now I can go and find a rental home and it's selling for about $200,000. And let's just say that if I buy that home, I can rent it out for $1200 a month.


Now, since I have the money and I can pay cash for the home, what's gonna happen is I gonna take in all those rents. So at 1200 dollars a month, that's 14-4 per year in rents and of course, I got costs and maintenance and insurance and taxes and so forth. But let's just kind of keep it at that for this sake of argument. Now, that equates to about what's called a 7% cap rate. Now a cap rates kind of the rate of return in other words, 14-4 divided into 200,000 about 7%. That may be high or low cap rate depending on where you live and what's gonna in your rental markets. Now, again, basically the cap rates, your kind of your rate of return on the amount you invest in. So along with the cash flow, the 14-4 the rents, if you will, I also get the equity appreciation of the home. So let's just say for the next 10 years, the homes gonna go up in value at 3% per year.


So it go up about $6,000 in the first year. And what we're gonna do is we're gonna compound that return, meaning we're gonna have the $6000 grow as well. So in 10 years, we'd have gained roughly $68,700 in appreciation. So in 10 years, we could turn around and sell the home that we bought for $200,000 for $268,700. Now let's see how leverage might work. So what leverage does is instead of putting the entire $200,000 into one home. What we could do is leverage that into 5 homes. For instance, if we bought 5 homes but put $40,000 down on each home, which is about a 20% down payment and then we would turn around and get a mortgage for $160,000 on each home. This is leverage. By using the bank's money, we're able to get into 5 homes rather than just 1. Now your rental income would be the same on each home $14,400. The cap rates the same on each home. However, we do have mortgage payments. If we take $160,000 at 5%. In a 20 year mortgage, the mortgage is about $1,000 a month.


So remember bringing in 1200 so that leaves us about 200 a month or 2400 a year per home after we paid the mortgage payments. So if we add up all 5 homes, that's a total of $12,000 per year after the mortgage is paid. Now we're leverage starts to accelerate your wealth is you've got 5 homes growing, and each of them also appreciated the same $68,700 or a growth rate of 3% per year. So your growth on all 5 houses combined is 343,000. By owning 5 homes, instead of 68,000 by owning just 1 home. Now by paying cash, obviously, you brought in the full 14 for a year in income because you didn't have a mortgage. If we take that times 10, so 14-4 not including any rental state or excuse me, rental rate increases, that's gonna bring in about 144,000. So if we add that 144 to the 68,000 and appreciation are Overall single home had a net growth in cash flow of $212,700. Pretty good.


Now if we look at the 5 homes after the mortgage was paid, remember, that gave us about $20400 per year per home times 5 homes or $12,000 a year. If we fast forward that over the next 10 years again without any rental increases, that's 120,000. Now if we add the cash flow to the equity appreciation of 343,000, we've got a cash flow and appreciation combo of 463,000. So you pretty much more than doubled the return by using leverage rather than just paying cash. Now a business uses leverage to keep cash on hand. It's oftentimes better for them to borrow cheap money and invest cash assets into growing the company for instance. Now what's the downside to leverage? Well, it's obvious you probably already know this. If you borrow money and the market shifts and changes, you can be upside down in a home. And you still have to pay those mortgage payments, even though your home may be worth less than your mortgage balance.


If you own a home without a mortgage and your rental unit is vacant, you don't have a mortgage, you're likely gonna survive the downturn. You can even set the rental rate lower to attract a renter, just to kind of get you through that cycle. If you had 5 rentals, each with a mortgage and you have vacancies in 2 or 3 of them, or even worse 5 of them. Well, that might be difficult to pay 5 mortgage payments at $1,000 each or $5,000 a month. That's what happened in 2008. We had all these subprime mortgages anyone can get alone, you can get a HELOC, which is a home equity line of credit On top of your mortgage for as much as 125% of your home's value. Then when the market shifted and dropped, homes were upside down really fast, families owed more than they were worth. And many of them just said, Hey, heck with it, I'm moving out. I saw homes that were worth $1.8 million or I should say that were selling for $1.8 million, eventually go for short sales at the bank for 700,000 and less.


Now, there was a lot wrong with 2008. Banks did stupid things. Hopefully, we're not gonna go into that situation ever again. There were many who went to jail because of what they would do is they would sign docs that they were gonna buy a home from a builder. But then they tried to flip it to someone else before the home was finished. I mean, it was kind of like the wild west of banking and subprime mortgages. At least at this point. We're seeing real estate prices increase in demand going up, but they're still reasonable lending is still have to qualify. The home has to appraise for what it's being bought at and mortgages are no more than 80% for conventional loans. So anyway, that's a different story. Let's get back to leverage. As you can see, leverage can work out in your favor. If the value continues to go up, or at least stay somewhat flat. If markets turned and values drop will leverage can be a catalyst for a further economic stress.


Another example of leverage occurs in the stock market. At brokerage firms. It's called margin. Now margin is a way to borrow money on the stocks that you bought to turn around and buy more stocks. So for instance, if you have a stock that's trading at $100 a share, you can borrow up to 50% of that value or $50 to buy more stocks. There are even ways to leverage up to 10 times or more with other securities. But let's just stick with the simple example of a 50% margin. You'd pay interest for the use of that margin just like borrowing money anywhere else, or even using a home equity line of credit still gonna pay interest. The problem is if your stock ever drops and it's trading at the margin balance, you're gonna get what's called a margin call. And you're gonna either need to deposit more cash or more securities to bring up the portfolio value. Or they're gonna sell your stock to cover the margin balance and the words they're not gonna let you go into the hole.


This is what happened to many investors back in the dot-com boom and bust in the late 90s, as well as 2007 going into 2008. Investors were used in margin to buy stocks and when they finally went bust margin calls were wiping out entire portfolios almost overnight. And as I said, Now businesses use leverage to grow a lot oftentimes to buy buildings or equipment or to expand. However, they too can get caught in the leverage trap. As an example, and one of the things we do if we're ever looking to buy a stock or a company, I like companies that could pay off all their debt in one, maybe one and a half times their revenue. In other words, they're smart with their borrowing. Okay, so why all this conversation on leverage? You need to kind of understand it because what I'm about to share with you is something that you may not have thought possible. What if you could use leverage to grow your money faster but that leverage had no risk to it? Yeah, sounds pretty good. Well, it's called secured leverage.


And it would certainly fit well within our mathematical equation of keeping our money safe compounding and using leverage to build our wealth faster. With the previous examples of using leverage in real estate and stocks, there's no assurance that you might not end up owing more than the assets worth. Typical leverage or debt has to be paid. Even if your home real estate stocks are trading less than what you paid for it. But what if the asset you've leveraged can never drop below the leverage? All right, let me give you a fictitious example. And let me emphasize fictitious example. Let's pretend you could buy a CD at the bank right now for 6% interest rate one year cd 6%. I know you're probably laughing. It's not possible. And I agree. But let's just walk with me here for just a minute. So what you do is you put your money into this CD at 6%. Then you go to the banker and you say I would like to get a loan using my CD as collateral.


And the banker agrees and he loans you at a rate of 4%. Okay. So now you take that money you borrowed at 4% and you turn around and buy another CD at 6%. So now you have two CDs. By the way, in the investment world, this is called arbitrage. It's making money on the spread between your cost of money and the return it produces. But I'm not gonna get into that too deep. We'll save that for another discussion. So let's suppose you do this 3 more times. You borrow money on the new CD at 4%. Go buy another CD at 6%. Then you borrow on that CD at 4% and buy another CD at 6% and so on. Now you have 4 CDs working for you. Now this would be extremely safe borrowing because you've borrowed money that's backed by the collateral of the CDs, which are guaranteed by the bank, which are never gonna be worth less than what you paid for them. If for some reason, or somehow you didn't pay back the loans, the CD is backing the loan.


So it's always gonna have money there to pay off that loan. The CD will never be worth less or lose money like it can in stocks or real estate. All right, let's look at it from this perspective. Suppose your original CD purchase was $100,000. So that CDs getting 6% interest right? Now again, for the sake of the example, let's assume you can get $100,000 loan against your CD. So you're gonna pay 4% interest on that loan, right? Then you turn around and buy another CD at 6%. That means on the second CD, that $100,000, you're gonna net a gain of 2%, right? You earn 6 but you've got a loan rate cost of 4. So you're gonna net 2. Now in our example, we're gonna do this three more times so that you have 4 CDs. So you have 3 CDs at $100,000 netting you a 2% gain. So looks like this CD one 6% gain at $6,000 in income that year, CD two, it's $100,000 as well. We're getting 6% paying for netting 2 or $2,000, CD three, the same thing. We've got 6% minus 4%, 2% and then we've got a $2,000 gain for the year and finally CD for the same thing.


In the end, I have one CD at 6%, which returns $6,000. Adding in the three other securely leverage CDs brings me in another $2,000 each or another $6,000 total. So that the amount that I get between all four CDs is $12,000 a year. Remember, we've only put in $100,000 into the very first CD. So our total return now is $12,000 on $100,000 invested, or if we divide that out, it's a 12% return. So if you could do this by using secured leverage, we could turn a 6% yield into a 12% yield and took no additional risk. Okay, so let me again emphasize, you can't do this at the bank. Okay. But if you could, that would be a great example of secure leverage. So what if you could do something similar to this but not use a bank? Sound interesting? Well, it is. There's only one place where you can put your money and you can do the secured leverage. It's done by using a specifically designed life insurance policy. Yeah, that's right. Something you've probably never seen or heard of or knew it even existed. Don't worry, not even your agent or advisor is heard of this either most likely.


You can't simply call up your traditional financial advisor and hope he or she has any clue as to what this means or how to use a well designed secured leverage policy. So let's talk about how this works. And if it's a good fit for your situation, they don't fit necessarily for everyone, but for those that fit it can be a game changer. So if this is something that you like to talk about, see if it fits in your particular situation. Click on the time trade link below. Claim your spot for a quick conversation. And we'll get together and talk about it. See if it's a good fit for you. In the meantime, if you have any questions, shoot them to questions at why is Money tools.com. Will answer them just as quick as I can. Don't forget to subscribe. We've got a lot more coming centered around these topics. I think you're gonna be very informative and exciting to learn about. So until next time, hope you have a great week. Take care.