Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Dictionary of Finance and Investment Terms for: reverse leverage
situation, the opposite of financial leverage, where the interest on money borrowed exceeds the return on investment of the borrowed funds.
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
"The Dangers of Leverage
Just as leverage can work on your behalf, it can also work against you. Revisiting our earlier example, if you use a $100,000 down payment to purchase a $500,000 home, and real estate prices in your area decline for several years in a row, the leverage works in reverse. After year one, your $500,000 property could be worth $475,000 if it depreciates by 5%. A year after that, it could be worth $451,250 - a loss in equity of $48,750.
Under that same 5% price-decline scenario, if that $100,000 had been used for an all-cash purchase of a $100,000 home, the buyer would have lost just $5,000 the first year home prices fell.
---------------------------------------------------------------------------------------------------------------
it isn't just pertaining to getting more in income than the interest, it is return on the investment being less than the interest ..
Last edited by mathjak107; 09-05-2015 at 07:55 PM..
Mathjak107 you are just making up this reverse leverage to try to vilify leverage or whatever. You are trying to argue that someone that has $360,000 compared to someone that has only $60,000 is in a better financial situation. DUH!!!!! But then you are trying to blame it on some made up concept "reverse leverage".
Now in YOUR example we have BOTH lost $72,000. Because you did not use leverage you have $288,000 of your $360,000. I only had $60,000 to start so even though we both LOST EXACTLY THE SAME AMOUNT I could argue that I am still in a better position than you. If I'm in a nonrecourse state I can walk away and ONLY lose $60,000. I could also go to the lender and renegotiate. Guess who is in the better position, you with $288,000 equity or me with ZIP.
See the difference?
whether you can ditch your obligation or not is irrelevant , it is what it is .
any time you borrow money to leverage what you have you run the risk of it working against you .
it is nice when you only put 60k in the investment and a 300k property moves up 20% for a 100% return on investment but the reverse can hurt just as much . the same 20% move on the property is a 100% loss on investment .
how and if you reconcile what you owe is a totally other discussion .
Dictionary of Finance and Investment Terms for: reverse leverage
situation, the opposite of financial leverage, where the interest on money borrowed exceeds the return on investment of the borrowed funds.
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
"The Dangers of Leverage
Just as leverage can work on your behalf, it can also work against you. Revisiting our earlier example, if you use a $100,000 down payment to purchase a $500,000 home, and real estate prices in your area decline for several years in a row, the leverage works in reverse. After year one, your $500,000 property could be worth $475,000 if it depreciates by 5%. A year after that, it could be worth $451,250 - a loss in equity of $48,750.
Under that same 5% price-decline scenario, if that $100,000 had been used for an all-cash purchase of a $100,000 home, the buyer would have lost just $5,000 the first year home prices fell.
---------------------------------------------------------------------------------------------------------------
it isn't just pertaining to getting more in income than the interest, it is return on the investment being less than the interest ..
TOO FUNNY! For leverage to work "negatively" you have to buy a $500,000 house compared to NOT using leverage by only buying a $100,000 for cash. The problem, AGAIN, is not the leverage, it is the buying more house (FIVE TIMES) than if not using leverage.
The correct comparison would be buying a $100,000 house with cash or with ONLY $20,000 down and investing the $80,000!!!
whether you can ditch your obligation or not is irrelevant , it is what it is .
any time you borrow money to leverage what you have you run the risk of it working against you .
it is nice when you only put 60k in the investment and a 300k property moves up 20% for a 100% return on investment but the reverse can hurt just as much . the same 20% move on the property is a 100% loss on investment .
how and if you reconcile what you owe is a totally other discussion .
Fun with percentages! OK OK I've lost 100%! I'll comfort myself knowing that YOU and I have lost EXACTLY the same amount of dollars but I have $300,000 CASH not stuck in the depreciating asset.
Now when the meteorite strikes both our houses YOU will be ruined but I'll have $300,000 to fight the insurance company. See how percentages don't mean a thing?
Once again I think this entire discussion boils down to two possible aspects. One, are you using your house as an investment? Two, are you using your house as a home you plan to live in long term. If we are investors or flippers then this thread means a lot. For people like myself who have a home to live in for the long term then this debate holds little interest. Everything fluctuates and security is a myth so live and try to be happy.
Fun with percentages! OK OK I've lost 100%! I'll comfort myself knowing that YOU and I have lost EXACTLY the same amount of dollars but I have $300,000 CASH not stuck in the depreciating asset.
Now when the meteorite strikes both our houses YOU will be ruined but I'll have $300,000 to fight the insurance company. See how percentages don't mean a thing?
why are you arguing whether to take a mortgage or not which is what you turned this in to .
we are not debating which is better nor have i ever said which is better .
the only point i ever made is that using borrowed money is a double edge sword .
you have some how turned this in to which is riskier which was never the discussion .
using borrowed money and leverage has good and bad effects when the magnification of the gains works against you , fact . , they are what they are but you arguing the fact you can walk away from the obligation still does not change the effects nor is even the discussion .
Last edited by mathjak107; 09-06-2015 at 02:22 AM..
Reverse leverage ????????? That does not answer my question. Let's say I was an unsophisticated buyer and didn't understand the positive power of leverage and bought paying $360,000 in cash. Now if the situation was EXACTLY the same and the prices fall 20% then my loss (paper) is EXACTLY the same $72,000!
Of course I have $288,000 sitting in this property that has lost 20% of it's value. Using the POSITIVE POWER OF LEVERAGE I have that $288,000 in my pocket or working for me in possibly a better investment.
Actually I have $300,000 in my pocket since I only used $60,000 of my $360,000.
Seems like there is no negative to using leverage.
In this example, the hypothetical buyer has $360K on hand. He/she can choose whether to invest all $360K into the house, or only $60K. If the house declines in value by 20%, the $360K-buyer has lost 20% of working capital, or $72K. The $60K leveraged buyer has lost the same $72K, but that $72K is 120% of the investment-stake in the house.
It's true that in both cases the loss is $72K, and it's true that the person who only staked $60K could earn a good return on the remaining $300K, perhaps more than compensating for the 20% decline in the house's value.
Now take the case of a buyer whose entire capital is $60K. That $60K becomes the down payment on a $360K house, which then declines by 20%. That buyer's net worth goes from +$60K to -$12K.
In the first case - where you have the full $360K, but choose what portion of it allocate towards the house-purchase - there is no penalty for "leverage". It's just a matter of how we deduct that $72K loss... from home-equity or working-capital. But in the second case, where the buyer only has $60K in total, there most definitely is an effect of leverage working in reverse.
Reverse-leverage means that you use something small to buy something big, then that something big declines slightly, and the slight decline wipes you out - because of leverage.
My point was that because of the utility of real estate that is not available in other investments that a priority should be on making this a good investment vs concerns for retirement and other investments.
What utility is available for owning that isn't available for renting and investing the difference, if there is one and it is big enough? Not everyone wants to spend their Saturdays at Home Depot or Lowe's in order to get this "pride of ownership" thing so many think is important. It's a personal preference. Preferring to do all that is one choice, preferring not to is another. Neither preference is objectively right or wrong for everyone.
In this example, the hypothetical buyer has $360K on hand. He/she can choose whether to invest all $360K into the house, or only $60K. If the house declines in value by 20%, the $360K-buyer has lost 20% of working capital, or $72K. The $60K leveraged buyer has lost the same $72K, but that $72K is 120% of the investment-stake in the house.
It's true that in both cases the loss is $72K, and it's true that the person who only staked $60K could earn a good return on the remaining $300K, perhaps more than compensating for the 20% decline in the house's value.
Now take the case of a buyer whose entire capital is $60K. That $60K becomes the down payment on a $360K house, which then declines by 20%. That buyer's net worth goes from +$60K to -$12K.
In the first case - where you have the full $360K, but choose what portion of it allocate towards the house-purchase - there is no penalty for "leverage". It's just a matter of how we deduct that $72K loss... from home-equity or working-capital. But in the second case, where the buyer only has $60K in total, there most definitely is an effect of leverage working in reverse.
Reverse-leverage means that you use something small to buy something big, then that something big declines slightly, and the slight decline wipes you out - because of leverage.
correct .
if someone only has 100k to buy a house then the best that 100k gets with their own money is a 100k house in in a cash deal . if the house declines 5% they loose 5K .
but if the take their 100k and borrow 400k and buy a 500k house and the house loses 5% they lost 25k of their investment .
Reverse-leverage means that you use something small to buy something big, then that something big declines slightly, and the slight decline wipes you out - because of leverage.
Well, if you are going to make up definitions to bolster your made up arguments.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
