Have you ever wondered why it’s easier for people who have money to make more of it?
I mean, why is it that the second and the third million are so much easier to earn than the first million?
Do you want to know what the biggest difference is between how the wealthy people build wealth and how the poor and middle income people do it?
It’s how they use leverage and I’m not just talking about borrowing money.
There are at least four ways successful investors use leverage.
Let’s look at them…
Firstly there is the leverage that you probably first thought of.
One of the biggest differences between how wealthy people and the average Australian go about building wealth isn’t how they invest the money that they have… it’s how they leverage and use the money they don’t have that makes them wealthy.
You see, the average Australian rarely uses leverage in any focused or strategic way, partly because they are afraid of taking on debt.
If they do build any wealth, they do it mostly by scrimping and saving the money they have, and using any “left over” income to slowly build their “nest egg.”
On the other hand, the wealthy investor has mastered the art of using money that they don’t have, to build their wealth.
They use borrowed money to magnify their investment activities and enjoy enhanced, accelerated returns. They take on more debt and borrow, gear or leverage their assets to own even more assets.
Yet the average Australian is frightened of taking on more debt.
In fact, many believe they must reduce their debt and pay off their home before they start looking at investing.
This is a huge difference in mindset.
When you have a more sophisticated understanding of the rules of using leverage, you are able to literally use it to take your wealth building to the next level.
When I look at an investment, I don’t ask myself, “Can I afford this property?” Instead I ask myself, “How can I strategically use leverage to help pay for this investment in a way that enhances my overall return without taking on more risk?”
Leverage, the ability to generate a magnified result from a specific asset, is normally thought of as “borrowing” money.
Yet this is only one of the ways you can use leverage to build your wealth.
You can also leverage your relationships or your network.
Successful investors build a great team around them.
They realise they don’t have to be an expert in every field if they develop a good network.
This network includes a good finance broker, a smart solicitor, a property savvy accountant and a knowledgeable property strategist.
Successful investors also have one or two mentors and they belong to a mastermind group.
This is a group of like-minded people who encourage each other and act as “unreasonable friends” helping each other push forward towards their individual goals.
Having a great network around you enables you to leverage off other people’s expertise. I often say “if you are the smartest person in your tem you are in trouble.”
How can you leverage your relationships?
In this world it’s not what you know and it’s not even who you know… it’s who who you know knows.
That wasn’t a typo.
Your network of relationships is critical to growing your wealth, not just for what they themselves know, but often for the people they know who could also help you.
Also, successful investors have learned how to leverage their time.
Many beginner investors waste so much time trying to do everything themselves. You will find them chasing late rental payments, doing minor maintenance and negotiating rent reviews with their tenants.
Successful investors value their time and have learned to leverage their time putting it to its highest and best use.
They do this by outsourcing these minor tasks to their property manager and to other contractors.
Instead they use their time to find learn more, develop their relationships or find more deals.
One of the greatest points of leverage is leveraging your “mind.” Successful property investors just think differently to the average person.
The not so rich have a different way of thinking – a different “reality”. To put it simply your reality is what you think is real in other words your perception is your reality.
What stops many people becoming successful investors isn’t what they know or don’t know.
It’s what they think they know that isn’t so that stops them moving forward.
They say things like:
- I can’t afford that
- I can’t do that
- I already know that
- That’s wrong
- I tried it once and it didn’t work
- That’s impossible – you can’t do that.
If you want to become truly wealthy you will need to open your mind to new ideas and develop the skills to take on the possibilities greater than your current abilities.
It’s just too hard to become wealthy from a perception or reality (because your thoughts – your perceptions become your reality) of lack and limitation.
I remember Robert Kiyosaki saying in one of his Rich Dad Poor Dad books that a cynic’s reality does not let anything new in, while a fool’s reality does not have the ability to keep foolish ideas out.
While these four main leverage points can help make you a successful property investor, when you think about it, you have so much more you can leverage.
You can also leverage your skills, your creativity, your intellectual property, your net worth, and your reputation to build wealth.
The list goes on and on. Stretch your mind to look for opportunities to leverage in new ways.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property. Subscribe to his Property Update blog.