Tom made a video for YouTube where he broke down the secrets behind how the ultra-rich, like his friend Robert Kiyosaki, leverage debt to build massive amounts of wealth.
The video quickly got over 400K views, meaning this is an important topic for many people.
If you haven’t seen it yet, the video is called, “Robert Kiyosaki’s 1.2B Debt Explained by His Tax Advisor.”
The fact is that leveraging debt is a strategy available to everyone. When executed correctly it can significantly accelerate your wealth-building goals.
Compounding Interest
Tom's mother introduced him to the concept of compounding interest. The "rule of 72"—a method to estimate the doubling time of an investment—says a 10% return could double your money every 7.2 years. Good? Yes, but not great… there's a better way.
Compounding Interest with Debt
By strategically using debt, you can significantly boost your investment outcomes. Let’s say a $20,000 investment earning a 10% return yields $2,000. Now, add $80,000 of borrowed funds to the mix, and you could see a return of $10,000. Even at 7.5% interest on the debt you’ll still double your return with $4,000.
Real Estate: Leverage Debt and Taxes
Real estate investment stands as a prime wealth-building tool, combining the leverage of debt with tax efficiencies. By understanding how to navigate tax implications, such as leveraging depreciation deductions, you can supercharge your investment returns.
Some things to consider….
Recourse vs. Non-Recourse Debt
In the world of debt, not all loans are created equal. Recourse debt carries the risk of personal asset seizure in case of default. Non-recourse debt, preferred for large real estate investments, limits the lender's claim to the property itself, thus reducing personal risk.
Knowledge is the Key
It's essential to understand that leveraging debt also increases risk. If the value of the asset decreases, you could end up owing more than the asset is worth. Additionally, if the income from the asset doesn’t cover the debt payments, you’ll need to fund the shortfall, which could strain your finances.
Fear often arises from a lack of understanding. Successful leveraging requires a thorough understanding of the investment, the terms of the debt, the tax implications, and a solid plan for managing the increased risk.
Always consult with your financial advisor to tailor these strategies to your personal financial situation.
Want to learn more about how you can make way more money and pay way less tax? Book a call with the team at TFW Advisors® today!