3 Ways I Have Used Leverage to Improve my Net Worth: This is my follow up to my article I recently posted: “The best way to make money with real estate – use leverage!” I wanted to show some of my own examples of where I have used leverage to make gains in net worth. If you’re looking for the best way increase net worth – you will need to learn to leverage your money. Saving your way to wealth is challenging but there are other ways. Can you increase net worth through savings? Sure. However, using leverage is a sure fire way to expedite the process.
Now that we’re all caught up on what leverage is and how it works, we can get to the teaser in the title. Outside of the usual ways to use leverage, there are other ways.
Here are some of the things I have done before:
Leveraging my down payment for a rental property
When I purchased my first rental, I didn’t have the full amount to buy it outright. They were asking $152,000. At the time I had around $25,000 saved. Every mortgage person I spoke to said that I needed a 20-25% down payment in order to qualify for the loan.
So, I was stuck. Saving up $25,000 took a while and I didn’t want to wait all of that additional time to save up more money. The alternative was purchasing a cheaper property however in my area, they did not fare well (bad area, no appreciation, poor rental income).
I decided to partner up with someone (in this case, my father) to purchase the property. We would split the down payment amount in half. This meant that the deal was back on the table and I wouldn’t have to wait years to get started. The additional bonus is that I was teaming up with an experienced investor in the process!
Using creative financing to avoid PMI/escrow
Flash back to last year. My wife and I wanted to move to be closer to our families after moving an hour away two years ago. The problem once again – money. We had enough money to maybe put 10% down. The problem is that I wanted to avoid PMI for numerous reasons, mainly: increased monthly cost and when you have PMI, you need an escrow account. I hate escrow accounts, but that’s a different post!
After calling my usual mortgage brokers and striking out, I found one that was willing to entertain an idea I heard from Biggerpockets – could I use my 10% down payment and a home equity line on the property I was purchasing as my down payment? I would have more that 20% down (only 10% out-of-pocket) and I would avoid PMI and escrow.
Although reluctant at first, the broker agreed! The broker and I settled on a 10% down payment, 15% home equity line and 75% mortgage arrangement. We completed all the paperwork and the house was ours. We plan to pay down the home equity line as quickly as possible and then have a single mortgage.
Paying ahead on expensive debt for massive savings
Student loans and other debt. This one is a little different as most people do not think about paying off debt as “leveraging your money” but hear me out. Let’s take a look at my student loans from 1/12/2012
Taking a look at 1-07, we have $5,657.51 with an interest rate of 7.9% which is the highest rate of the bunch. That’s nearly 8%! If I let this loan go on for it’s full duration of 10 years, I would have been charged $2,565 in interest! That means my 5,657.51 debt really was $8,222.51.
After running these numbers, I realized that paying off these debts not only would improve my financial health and free up money every month but also allow me to generate a massive savings over time. So, off I went – taking every spare dollar and throwing it at the highest interest debt I could. From 1/12/2012, it took two years to pay off these loans. Between moving out, getting a new car and getting married – it wasn’t too bad!
Knowing what I know now, I really wished I found something like SoFI that I could have used to refinance my loans down to a lower rate. Battling through 8% interest is insane. I’m glad it is done now but I could have done it much more efficiently!
It is hard to improve your net worth and financial position without accelerating the process somehow. I admire the people in the Financial Independence movement who can save their way to freedom through multiple brilliant methods however for most of us, it would be very challenging. Leveraging provides most of us with a way to take a calculated risk to receive a much larger reward, which makes it the best way increase net worth.
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