Leverage can be used for several different reasons. You can use it to blackmail someone. You can use it for a simple see-saw. Or you can use it to get rich.
Lets talk about getting rich.
In financial circles, leverage is a term used to describe using other people's money to increase your investment potential. For example, if you take $20,000 and borrow $80,000 from a bank to purchase a $100,000 property, you have leveraged your initial investment to purchase something more valuable. Let's say that this property appreciated 5% a year for 5 years.
Year One: $100,000 @ 5% =$105,000
Year Two: $105,000 @ 5% =$110,250
Year Three: $110,250 @ 5% =$115,762.50
Year Four: $115,762.5 @ 5% =$121,550.62
Year Five: $121,550.62 @5% =$127,628.15
So your $100,000 investment is now worth $127,628.15. That is over a 27% return right? Wrong. You only invested $20,000. Your $20,000 has returned 138% in five years. And because we also cash flowed every month and also paid down the mortgage and depreciated the property on our taxes, the return is even greater. This is the power of leverage, and this is one of the many reasons of why you should be investing in real estate. This is also a reason why you want to make sure you are working with someone that understands not only the benefits, but the risks as well.