Ever wondered how the wealthy manage to keep getting ahead? It's not just luck or hard work - it's smart financial strategy. Let's unravel one such strategy, called 'Leveraging', on the Finance Bible podcast. Your hosts, Oscar and Zeke, simplify this complex financial term to help you understand how it can become a game-changer in your financial journey. The concept revolves around using borrowed capital to invest, focusing on income-generating assets like shares and properties. But leverage isn't a one-size-fits-all solution and requires a wise approach.
This episode is far from a dry, theoretical discussion. We breathe life into the numbers with real-world examples, highlighting how leverage can be used to build an empire. Drawing inspiration from the story of Robert Kierstar, an investor who turned borrowed money into a billion-dollar real estate venture, we explore the transformative impact of leverage. But remember, leveraging isn't meant for everything - funding vacations or non-income generating assets are a no-go. So get ready to discover the power of leveraging and learn how to use it wisely in your financial planning.
For any enquiries or to connect with Oscar, Zeke, or their company, Asset Road, listeners can visit the following links:
The advice shared on The Finance Bible is general in nature and does not consider your individual circumstances. The Finance Bible exists purely for educational / entertainment purposes and should not be relied upon to make an investment or financial decision. If you do choose to buy a financial product, read the PDS, TMD and obtain appropriate financial advice tailored towards your needs
Ever wondered how the wealthy manage to keep getting ahead? It's not just luck or hard work - it's smart financial strategy. Let's unravel one such strategy, called 'Leveraging', on the Finance Bible podcast. Your hosts, Oscar and Zeke, simplify this complex financial term to help you understand how it can become a game-changer in your financial journey. The concept revolves around using borrowed capital to invest, focusing on income-generating assets like shares and properties. But leverage isn't a one-size-fits-all solution and requires a wise approach.
This episode is far from a dry, theoretical discussion. We breathe life into the numbers with real-world examples, highlighting how leverage can be used to build an empire. Drawing inspiration from the story of Robert Kierstar, an investor who turned borrowed money into a billion-dollar real estate venture, we explore the transformative impact of leverage. But remember, leveraging isn't meant for everything - funding vacations or non-income generating assets are a no-go. So get ready to discover the power of leveraging and learn how to use it wisely in your financial planning.
For any enquiries or to connect with Oscar, Zeke, or their company, Asset Road, listeners can visit the following links:
The advice shared on The Finance Bible is general in nature and does not consider your individual circumstances. The Finance Bible exists purely for educational / entertainment purposes and should not be relied upon to make an investment or financial decision. If you do choose to buy a financial product, read the PDS, TMD and obtain appropriate financial advice tailored towards your needs
Zeke Guenthroth:
Hey guys, welcome back to another episode of the Finance Bible podcast.
Oscar Don:
We are your hosts, as always, oscar and Zeke, and please note that nothing in this podcast should ever be considered as personal financial advice.
Zeke Guenthroth:
And if personal financial advice is what you are after, then please get in touch so that we can connect you with the correct professionals to make sure that the job is done correctly. Enjoy the show. On today's episode we have a very exciting topic, one of our favourites. A little trip to the past. You could say Leverage what it is, how it works, everything about it. You joined with myself, zeke, fellow co-host Oscar, welcome mate.
Oscar Don:
Mate. It is always good to be doing a podcast on a Thursday morning, especially leveraging. It is a throwback. Our third overall original episode was on this, so we are just having a bit of a revamp. So people may be thinking well, what is leveraging? What does that even mean? I will give a pretty generic, simple definition and you can confirm or deny if you agree. Zeke, basically it is using money you don't have to catapult into further assets. So borrowing debt to invest is my short, simple, sharp definition. Now, zeke.
Zeke Guenthroth:
I like the way you used the word catapult there. It is actually a really good term.
Oscar Don:
Oh, thank you very much.
Zeke Guenthroth:
Yeah, basically leverage, you use money that you don't actually have as in someone else's the banks money to go ahead and leverage into an asset. There are a few things to break down there. First of all, what is it actually useful for? What is leverage good for? We will get into that a bit later. And when we say leverage into an asset, what do we mean by that? I tell you what we don't mean. We don't mean credit cards. We don't mean cars unless there is a good tax write off to it, which is a different conversation. We don't mean a home. You can leverage into a home. I understand some people want a home. We've got a family, that kind of thing going on behind the scenes. But when we're talking about leveraging into a good asset, we're talking more of the investment class, for example, shares or investment properties mainly investment properties and anything that will actually help you generate an income long term.
Oscar Don:
Yeah, exactly Right Like an income producing asset is really how you can benefit from the leveraging conversation. And people may say borrow money for holidays. That does fall into the bad category. As you mentioned before, zeke, I actually know a couple of people in the past who have taken out loans to use for a holiday and they're still paying them back 10 years later. So that is a tough conversation to have. But Robert Kierstar our favorite author, speaker, investor loves leverage. He borrowed US$300 million in 2008 to invest in real estate Money he didn't have, but he used it the catapult into investment properties and now he's a billionaire. He's one of the wealthiest men in the world. He's got how many properties he has. He was over 15,000.
Zeke Guenthroth:
He does have over 15,000 properties.
Oscar Don:
Every single property as well of those 15,000 generating human income. So he literally lives off the rental income. But in 2008, when the GFC happened, he saw an opportunity to borrow the money as all the prices were crashing down. And now he's one laughing. I'll say a little quote that Kierstar he has mentioned about leveraging and it goes like this People without leverage work for those with leverage. Just let it sink in.
Zeke Guenthroth:
Yeah, dwell on that for a minute. People without leverage work for those with leverage. What does that mean? Simply, those of whom have leveraged into an investment property, for example, own the investment property they rented out to people. The people who are renting, generally speaking, this is a broad statement. Generally, the people who are renting are then paying and working for those of whom have leveraged into that investment property. Oscar, you know I'm a numbers man. Our fans, you know I'm a numbers man, I love numbers.
Oscar Don:
What do you?
Zeke Guenthroth:
got for today? What have I got for today? What's on the menu there? I've whipped up a little something special. I've got two examples, nice and easy, just to show what the actual power of leverage does. I've kept everything pretty well similar in terms of the yields and the growth and that kind of thing, just to paint a clear picture. So let's say you've got 200k in cash. Throw that in the shares. They pay a 4% dividend to give or take and they're growing at something like you know, 5% a year. Just to keep it really easy, what happens there? Over 10 years you end up with about 440 grand give or take. Again, these numbers are rounded.
Zeke Guenthroth:
I'm doing it very simple to show an example. If you go to the next example, we've got that 200k. We've used it to leverage into, let's say, an investment property. Now that investment property pays you 4% of rent and we've done a 25% deposit. So we've now got an $800,000 asset as opposed to the original $200,000. So we've borrowed 600 grand, done the 25% deposit and it's growing at 5% per year as well. Over a 10-year period everything kept the same. The numbers are interesting. I'll put it that way we get to about just shy of $1.8 million. So example one no leverage, $200k. $440,000 give or take. Example two leveraging that money, keeping everything the same, about $1.8 million. You basically multiply your money by four, you multiply the result by four and if you keep on going and keep on going, that obviously eventuates into completely absurd numbers. Like if you just go 25 years just for a bit of fun, you end up at $4.6 million with the leverage strategy, whereas if you do it the other way, you only end up at $1.1 million. Think about that.
Oscar Don:
There you go, your numbers never fail to impress you and following on from that, that's basically just one leverage strategy. A lot of wealthy investors with the property side of things continue to recycle the debt to get into another investment, then another investment, then another investment and then all of a sudden they may have 10-plus investment properties, paying them around $300k to $400k per year in income. In my mind, if the wealthy investors do it like they're literally telling you how they've amassed their money, how they become wealthy and the common, the word is leverage. They all use leverage to build their wealth. So it's a bit of a no-brainer in my mind. And there's two different types of leverage Personal leverage in your personal world and you can also leverage in your super fund.
Oscar Don:
So personal leverage is easier as opposed to the superannuation, because, generally speaking, you have your whole income to actually serve as the debt With your super. It's a whole, completely different world. So, smsfs, we can only invest in property through a self-managed super fund, but they generally they don't really look at your income. They look at more of your contributions to your super. So if you have steady contributions coming to your super fund, that's fine. But for individuals who generally are self-employed and don't pay themselves contributions, you may find it quite difficult to leverage in a self-managed super fund if that's something you're wanting to do.
Zeke Guenthroth:
Yeah, there's a few differences when you move from personal to self-managed. Obviously, you've touched on the first one there servicing you said it perfectly personal world. You've got your total income that can be used as service alone, whereas in super it's based on your deposits and then obviously, the rental yield too. In terms of deposit, there is a difference. You're normally talking roughly 20 to 30% deposit. This can go up to 35%. It can have a lot of different variances, but they're the averages, just to give you all an idea. Whereas in your personal world you can go a lot lower. In terms of a liquidity buffer as well, you've got to maintain I mean, industry standard is roughly 10 to 15% liquidity buffer. So what that means is the total amount of value of funds in your fund. You need to have 10% of that aside, not in the property, so it can be in like shares or as a liquidity buffer, so that if anything goes wrong, you've got that there.
Zeke Guenthroth:
In saying all of that investing in super, I think it's a genius idea as young people speaking for Don and myself and probably a lot of the other people in our age bracket, and giving a bit of perspective on what you should and shouldn't do or what we think you shouldn't, shouldn't do.
Zeke Guenthroth:
We would both be focusing on our personal world first, as that's a lot easier and quicker for us at our age, and then, if we go to super, world is basically, as you get older and you've already focused on your personal world, then it may be worth coming back and visiting super after that. So, for example, if you've done what you can in your personal world, you've leveraged, you've got everything going on there, you kind of maxed out at what you can do, then it might be worthwhile going all. Right, well, let's focus on building up the super now and getting that going. Generally speaking, and again very general, you need roughly 200, 220 grand in a self-managed fund between you and your partner or you and a few mates or whatever, to actually be able to invest in a property in your self-managed fund. Anything to add to that, don?
Oscar Don:
No, I think that's good focus on the personal side. First, because at the end of the day, you can only really access the funds in your super at a minimum age of 60. It does change depending on the year you were born. Some may be a bit later, etc. But generally speaking it's around 60 that you can only access the funds. So if you are in your 20s and 30s, for example, or even 40s, it is probably more appropriate to focus on your personal world if you haven't already and build that up to an asset base that you want to possibly live off in retirement. And then, once your super is built up, you can also leverage into an asset through your super fund when you're a little bit older. So that's a general way of doing it as well.
Zeke Guenthroth:
When we're talking about the comfortability of debt and stuff like just going back a little bit to one of the personal side and how I was talking about investing in a home versus investing in an inventive property, the debt is very different.
Zeke Guenthroth:
So the debt when you buy a home and why we don't class it as an asset, because you actually that debt doesn't do anything good for you, like you've leveraged into it, you're not getting rent on it, you're not getting tax deductions for it, you're just tied up and it's not helping you in any kind of way aside from mental and emotional help. Whereas if you invest in the property and you tenant it and you've got a money against it, there's a lot of interest deductions you get, you get rental income from it, and the Aussie mentality has always been let's buy a home, renovate it and then in retirement we'll watch shows on renovating homes and then we'll probably downsize and renovate and upgrade and do it all again and again and again. So property is always going to be the forefront of everyone. Everyone needs something to live in. I just choose to rent, as does Don at the moment.
Oscar Don:
Yeah, it's an interesting topic. It's a whole different topic, that one really. But it is funny that the whole mindset of Australians and people around the world as well, that you kind of have to buy a home If you don't have a home, if you don't own a home, you're deemed a bit of a loser. But it's not the case. Like, imagine living where you want to live while you have assets working in the background and paying you an income, so investing in property they're paying for themselves. You're getting rental income and you rent in the best places you want to live Like.
Oscar Don:
You may want to live up in the Gold Coast one year, or you may want to go to Sydney. You have the freedom to do that. But if you're locked into a big mortgage and you're occupying a mortgage that you're paying, you're not going to go over somewhere else and live there for you if you really wanted to, because you're now married to this mortgage for 30 years. But if you rent where you want and invest on the side a bit of rent investing we call it you have all this freedom and you really won't be wasting your best years of your life by just trying to make the repayments. So that's our mindset. Generally, a lot of our clients have that mindset as well. But yeah, it's just trying to break free out of that traditional mindset of you got to go to school, uni, buy a house and settle down Completely changed.
Zeke Guenthroth:
This topic is genuinely one of the most interesting topics that we do and, generally speaking, it's very complicated too. So anything that we said make sure you bear in mind is very general in nature. If you want to learn more about it, if you want to explore further, please get in touch with us. You already know how to do that. Aside from that, we'll catch you all next time. Ciao.