LEVERAGING

 

Leveraging is borrowing money to invest. Most people call it OPM or Other People’s Money. This is very tricky as it can magnify your gains or losses. But, if you’re sure of the investment vehicles you will invest your money to, then leveraging is a thing for you.

Here are ways you can use leveraging to your advantage:

1. Leveraging from your Credit Card’s credit limit. Let’s say you own a small business with fast moving goods. You can dispose all your items in less than 30 days. Using your credit card to purchase raw materials, allows you to use the bank’s money as your capital. Granting you have a credit limit of Php60,000 and use it for purchasing raw materials for your baking/food business. Purchasing all these items right after your cut-off date, gives to approx 50 days before your due date. Since food items are fast moving goods, and granting you’ve sold everything in 30 days with a decent profit margin of 30% — in effect, you’re ready to pay up your credit card debt even before your due date. Since you pay everything in full every due date, the credit card company charges you with nothing. This is like putting up a loan for Php60,000 in 50 days with 0% interest.

2. Taking up a loan with small interest rates and investing it with higher gains. Let’s say you’re a member of a cooperative, and your coop allows you to put up a loan and only charges for 10% p.a. interest rate. If you bring your money to fixed income tools that will yield definite and higher returns, then you have leveraged from your coop’s money. Several Rural Banks offer higher interest rates for long term placement, ranging from 12% to 20% for a 5-year placement. If your investment will gain 12%, and your loan is at 10%, then in effect you gained 2%, and this is not even your money. I suggest extra caution when you try this type of leveraging. Never invest your borrowed money in something that will not yield definite and fixed returns — like mutual funds and stock market, as you can’t afford to lose your principal. When investing borrowed money, always protect your principal, and your gains should always be higher than your loan’s interest rate.

3. Flipping Real Estate Properties. Though, this is not for everyone as it takes a lot of skills, many people use this type of leveraging to earn high profits. Let’s say a bank is selling a condo unit (foreclosed items)for 1M, and gives the full control to the successful bidder with only 10% downpayment. This means, you only need Php100k to take control of the property and pays the monthly bank amortization. You can now improve it and shell out some extra money to boost the sale value, or sell it as is for a profit. Let’s say, you flipped the property by shelling out another Php50K for some improvements, but sold the unit for 1.5M. This is a clear profit. You dont have to be a millionaire to close a million-peso sale/deal.

Though, the above examples seem very easy. It takes careful analysis before one can pull off a profitable deal. You have to be 100% sure that your investment will protect your capital, and your profit will always outweigh your loan’s interest rate. It not, then don’t risk using other people’s money — as this can make or break your credit rating.