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This episode is a business coaching course that teaches what a financial leverage is.

Results-Focused Training, Tools, and Workshops from Expert Business Coaches.

Featured Coaching Excerpt - Notes & Transcript, Part 1
  • Definition Magician: Financial Leverage: The use of borrowed funds to acquire an investment.
  • Lesson Nugget: Debt can be used as a tool to create financial leverage that allows you to invest in assets you otherwise could not afford.
  • Lesson Nugget: Your leverage percentage is equal to the amount of money you need to borrow (debt) compared to to the total cost of the investment.

teamtreehouse for training in financial leverage, find an alternative to lynda.com

-All right Thrive nation. We are joined here in sunny San Diego today with Michael. There is no real estate term too obscure, beer. Airplanes are in the background. If you look closely in the ocean, you'll be able to see there's some ocean life out there.

There's the beach. And we're at the Hotel Del, where you can just smell the ocean. It's beautiful.

And we're choosing though not to go out there and suntan. We are choosing to be right here on Thrive15.com, an alternative to lynda.com, with you talking about real estate terms that you need to know. And this term we're going to talk about today is financial leverage.

I'm going to read the actual definition. He's going to explain to you what it means in layman's terms, so that lay men like myself can learn it. So here we go. Financial leverage.

-A lame man?

-A lame man like I-- now, when you get humor from mentors, it throws me off my game. So I'm going to try to get it back together. I'll tell you, I think I pulled a hammy.

-I thought I just misheard you. I'm sorry.

-I feel like I pulled a hammy when you mentioned that. Yes, no. I'm not a lame man. So I'm going to read the term here until I can collect myself emotionally.

The use of borrowed funds to acquire an investment. The use of borrowed funds to acquire an investment. What does that mean?

-It means debt. Debt. So you're buying a building with debt.

-Did you say you're dead?

-No. Debt. So basically, you're using other people's money, and that is a tool that is allowing you to take maybe your more limited resources and buy a larger building, a larger investment. And that is considered or called leverage. Financial leverage, in this case. And many people find it funny.

-You have complete mastery. I'm like a puppet, and you have mental mastery. You broke my frame and now I must continue.

[BEEP]

-So let me ask you. When you're talking about financial leverage and debt, how do you have any idea how much debt's appropriate? How much is not appropriate? Because you hear a lot of people talk about well, that's good debt, that's bad debt. Some people will say, oh, that's bad. How do you know what the appropriate amount of financial leverage or debt is for you and your financial goals?

-So it all depends. But debt is a tool, and it's not good or bad. But it's going to magnify whatever is happening at the property. So debt increases the amount of risk in a project, because you need less variability to wipe out your initial investment.

So if you bought a building for $100 and you get a loan for $80, you put $20 into it or $20 of cash. If it goes down 20%, it's worth $80. Your investment is wiped out.

-Let me ask you though. Have you ever seen somebody make billions of dollars in real estate without borrowing money?

-No.

-The reason why I'm asking is because a lot of people want to get into real estate, but they want to do it with just cash. I mean, if you're going to get into real estate, you're going to have to eventually borrow money.

-Yeah. You're using debt as a tool in the appropriate circumstances to leverage your cash. Your investment.

-Is that hard for a lot of people to grasp when you're talking to people who aren't involved in real estate and they realize how much money is being borrowed? Does that overwhelm people?

-I think, yeah, it could be scary to some folks. But it can be an appropriate tool.

-We don't know the exact numbers, but a guy like Donald Trump, for instance. He's famous for buying all these buildings and stuff, but he's borrowing a lot of money to do these things, right? So ultimately the goal would be to what?

To leverage yourself to-- what's a ratio you want to get to? Is there any way you can say, like, if I'm going to try and build a billion dollar real estate empire, if I'm watching this and own two houses and I want to try to flip another, flip another, and then start buying buildings, is there some kind of ratio I want to stick within, or what?

-Again, it all depends on what your risk profile or risk tolerance is. Some people try to, effectively, borrow all the money to invest in a venture. But typically in a commercial deal your leverage levels could be anywhere from 50% to 70%, 75%.

-OK, so let's talk about what that means. If I am buying a building that's $100 million, and you're saying it's 70%, 75%, does that mean if I put in $10 that I could effectively borrow, or if I put in $10 million, I could effectively borrow $70 million? Or what does that mean at 75%. What does that mean?

-So if you have $100 million deal and you're going to get 75% leverage, you're putting $25 million in of your own money and then you're using leverage or debt for the balance. The other $75 million.

-OK. That's pretty typical for a commercial real estate? It's about 70%?

-Yeah. 60% to 70% would be on the higher end, but again it all depends on where you are in the cycle of the market and the markets.

-Michael, sometimes on Thrive here, you get to a point, you get to a dark period almost as a host where you're going, I don't know, making people laugh on a consistent basis, it's a burden. And the great-- it's weird, because the paradox is that people laugh and I'm secretly just sort of crying trying to think of what is funny. You know, get to the root of that.

So sometimes I bring other people in. And this particular time, I brought in a tall man. He's about six foot eight of great. He's awesome.

His name I shall not mention because I don't want to give him any credit. You know what I mean? I want to make sure I don't give him any credit. But he wrote this for me. He wrote this for me to say to you to express my appreciation.

-Well, let's hear it.

-I appreciate you like the proud American you are because of your lasso skills. Is that even true, really?

-Never lassoed.

-OK. Well, I'll just give you a boom but just kind of

Boom!

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