Magnify Your Wealth

Read More

Magnify Your WealthMagnify Your Wealth

One of the most powerful and fastest ways to build wealth is to use the principle of leverage. Leverage simply means to borrow money to invest in the expectation that the net returns from the investment will be greater than the interest payable on the loan. Leverage can be thought of as using other people’s money as well as you own to increase your investing power.

A common way of using leverage is to purchase an investment property. Here is how it works. You have $80,000 to invest. You use the $80,000 as a deposit on a house worth $400,000 and borrow the remaining $320,000 at an interest rate of, say 4%. Let’s say your investment property produces a gross rental income of $20,000 in the first year (5% of the value of the property). Interest is $12,800 and you have other expenses such as rates and insurance which use up the remainder of your rental income. However, the property grows in value by 10% ($40,000). You have invested $80,000 for a return of $40,000; that’s a 50% return on the money invested!

The reason this works is that the return you achieve on your investment asset is higher than the cost of borrowing. However, leverage should be used with caution. While it is capable of magnifying your profits, it can also magnify your losses. It is very important to establish from the outset that your intended investment will make a profit. Going back to our property example, if the rental income is not sufficient to cover the interest and other expenses and property falls in value, you will make a huge loss.

Leveraging offers potentially high returns but with high risk. Whether it is an appropriate strategy for you depends on your risk tolerance and your overall financial situation.

Related Articles

Liz Koh

Budget Winners and Losers

The latest Government budget had something for everyone but while most households will be a few dollars a week better off, there are some clear winners and losers. In the winners’ corner are businesses, those on high incomes, and savers. The biggest losers are property investors who have built large portfolios financed partly by tax rebates.

Read More »

Top Up or Miss Out

The end of June is an important date for KiwiSaver members. The financial year for KiwiSaver runs from 1 July 2009 to 30 June 2010 and if you have contributed at least $1,040 to KiwiSaver during that time, you will be eligible for the full amount of Government tax credit to be paid into your KiwiSaver account in July.

Read More »

Responsible Investing

There is a worldwide trend for investors to want to make a positive contribution to the world by investing in companies that are socially and environmentally responsible. If you are passionate about the effects of climate change, the scarcity of food and water, and social or environmental policies in general, then you will no doubt wish to ensure that the companies in which you invest are going about their business in a manner that is consistent with your views.

Read More »

Helping You Live your retirement To the Max

Keep in touch

Fill in your details and we’ll get back to you in no time.