ONE MINUTE #property READING: How Leverage Can Make You Rich (or Broke). Since property is such an expensive asset, generally most people would borrow money (i.e. mortgage) from the bank to buy one. When you borrow funds from the bank, there is often this jargon called #leverage e.g. 80% leverage (or LVR).

DISCLAIMER: This post is general information only and not a financial and legal advice.

Leverage in this instance allows you to hold an asset worth more than the money you have. With only 20% deposit (or 10% in my own case), you can buy a property. The bank supplies the 80-90% remaining funds. Some 2nd tier banks are even allowing you to put down even way lower deposit such as 2%.

I AM ALWAYS INTERESTED ONLY in looking at the amount of my own money I put on the table. With 20% deposit example, my own money consist of that 20% deposit + stamp duty and some other purchase costs (say, 25% total). The remainder 80% is bank’s money, not my own.

So… the 25% is what I am working with. That’s my #capital. I need to make sure I protect it the best I can. Now, this is the thing. That 80% LVR can make me rich (or broke). Let’s take this example further:

I am planning to buy a $500,000 property. I will put down $100,000 deposit (20%) with $400k loan (80% LVR). If that property goes up by 10% (from $500,000 to $550,000), my $100,000 becomes $150,000 (a 50% increase). However, it goes the other way too, that if that property goes down by 10% (to $450,000), my $100,000 becomes $50,000 (a 50% loss).

In WA, a lot of properties have doubled since 2019-2020. Say, that $500,000 property has now become $1,000,000. My $100,000 deposit has since become $500,000 (500% increase).

In saying that, someone who bought in 2014 might have seen a 50% drop during 2019-2020, which, if the property went down from $500,000 to $250,000, the original $100,000 deposit has been “lost”. In fact, the seller would owe more than the asset he has. I’ve heard stories which the bank would force sale unless the owner could top up with more funds i.e. a term called “margin call”. And even after the sale, sometimes the owner might still have remaining amount to pay.

So yeah, while leverage can really make you rich, it can also make you broke depending on where the market is going. People say, time in the market not timing the market. Bro, if you can time the market perfectly, that’s what has 10x my money.