Do you want to know what the biggest difference is between how the wealthy build wealth and how the poor and middle-income people do it? Then read on.
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 or third million are so much easier to earn than the first million?
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.
1. Leveraging money you don’t have
One of the biggest differences between how wealthy and the average Australian go about building wealth isn't how they invest the money they have... it's how they leverage and use money they don’t have to make them wealthy.
You see, the average Australian rarely uses leverage in a strategic way because they’re afraid of taking on debt. If they do build any wealth, they do it mostly by scrimping and saving and using any "left over" income to slowly build their "nest egg”.
On the other hand, the wealthy have mastered the art of using money they don't have to build their wealth. They use borrowed money to magnify their investment activities and enjoy accelerated returns. They take on more debt to borrow and leverage their assets to own even more assets.
Yet the average Australian is frightened of taking on more debt, believing they must reduce their debt and pay off their home before they start looking at investing.
This’s a huge difference in mindset. When you have a more sophisticated understanding of how to use leverage, you’re literally able 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 many ways you can use leverage to build your wealth.
2. Leveraging relationships or your network
Successful investors build a great team around them, realising they don’t have to be an expert in every field if they develop a good network. This network might include a good finance broker, a smart solicitor and a property savvy accountant.
Successful investors also have mentors and belong to a mastermind group. This is a group of likeminded 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’re the smartest person in your team you’re 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.
3. Leveraging your time
Successful investors have also learned how to leverage their time. Many beginning investors waste so much time trying to do everything themselves. You’ll find them chasing rents and doing maintenance on their properties.
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 learn more, develop their relationships or find more deals.
4. Leveraging your mind
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 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’ll need to open your mind to new ideas and develop the skills to take on the possibilities greater than your current abilities.
I remember Robert Kiyosaki saying that a cynic’s reality doesn’t let anything new in, while a fool’s reality doesn’t 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 Investment Strategists: www.metropole.com.au. His books are available from www.businessmall.com.au
© Australian Property Investor magazine – http://www.apimagazine.com.au. Reproduced with permission.