Wealth Formula Podcast

Leverage in the form of bank debt is a double edge sword. Obviously consumer debt to buy things like televisions and mall junk can only be negative in the financial sense. However, using debt to buy cash flowing assets is perhaps the single most powerful weapon we can use to create wealth and the thing that makes real estate the asset of choice for the ultra-wealthy. The problem is that leverage is a tool that you must learn to use because, after all, a fool with a tool is still a fool. Leverage must be deployed carefully based on the asset and the market. In 2008, banks and buyers were both over-leveraged and that created a big mess. For borrowers, it was often the first time that they paid close attention to the fine print on the mortgages which they signed. That fine print often included loan covenants.  A lone covenant is a promise that you make with a bank to lend you money. For example, a bank may say that they will lend you 80% of the value of a property. That means you have to come up with 20 percent.