How would you define "leverage"

[rocketgt]

In the context of Uncontrollable Limited Leverage and Controllable Unlimited Leverage, what exactly does the word "leverage" mean?

I'm most familiar with the definition from physics (i.e. the use of a mechanical lever). In finance, the word is usually associated with debt as in "the firm is highly leveraged". That sounds like a bad thing. Perhaps the definition from politics is most fitting. Political leverage means power and effectiveness. An employee has limited leverage when it comes to getting a raise.

 

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[fhs8]

In the context of Uncontrollable Limited Leverage and Controllable Unlimited Leverage, what exactly does the word "leverage" mean?

I'm most familiar with the definition from physics (i.e. the use of a mechanical lever). In finance, the word is usually associated with debt as in "the firm is highly leveraged". That sounds like a bad thing. Perhaps the definition from politics is most fitting. Political leverage means power and effectiveness. An employee has limited leverage when it comes to getting a raise.

It's hard to get a universal defintion since it's applied in different situations but I would define it as the fair market value of a security divided by the total capital allocated to that security. It's usually good to have a maximum leverage of 1. The higher the leverage typically means the higher risk of ruin. I didn't read the book but I see that it references "Uncontrollable Limited Leverage" after a search.

 

[TonyStark]

In the context of Uncontrollable Limited Leverage and Controllable Unlimited Leverage, what exactly does the word "leverage" mean?

I'm most familiar with the definition from physics (i.e. the use of a mechanical lever). In finance, the word is usually associated with debt as in "the firm is highly leveraged". That sounds like a bad thing. Perhaps the definition from politics is most fitting. Political leverage means power and effectiveness. An employee has limited leverage when it comes to getting a raise.

He explains leverage as your intrinsic value within the roads. The only way to get paid more in the slowlane is through a promotion, or a pay raise. Whereas a business, you control the amount of value your business provides giving you CUL.

You don't have much leverage in a job no matter how good you are. You can't control how much you get paid because that is predetermined by your boss.

Whereas in the Fastlane, you can control how much you get paid by improving your business.

 

[Nubiwan]

Leverage is putting 5% down on a $300,000 house. Living in it for 3 years, then selling it for perhaps $350,000.

You leveraged $15,000 against a $285,000 lender mortgage, then maybe sold at a $50K profit less expenses and fees. Depending on how creative you are at the back end, and avoiding an agent fee, then you might come out with $40K in your pocket, plus your $15 K deposit.

How creative you ask? Well, if you keep the home from the first example, then you have $65K worth of equity to play with.

If you set up a line of credit against your mortgage, you can take your $65K, put 5% down on a dump of a house, and fix it up.

An example of a purchase I made was to buy a home for $60K direct from a seller. I invested $50K in a fairly major reno. The house today is assigned to a rent to own/option contract to sell for $265,000 in 12 months time. So, in the 4-5 years I have owned this house, I will have netted roughly $165,000 in equity, plus my rent to own has cash flowed me around $800 per month with the present tenant. I also avoid a 5% agent fee on sale, as well as extablished my selling price at the onset of the contract. I don't have shitty tenants, I have a home buyer.

Its not FastLane, but it is real cash, from proven processes that have been around for years, and not pipe dream (get rich quick). I should write a book.

My proviso is that I live in Canada where house prices have remained relatively stable throughout the recent crises in the US market. Still, house prices always correct and rebound. in the long term, they are the safest bet of all.

 

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[jazb]

Take 2 people in the same business. one is a solo slow laner, the other has multiple employees and systems in place (fast laner)

The 2nd guy can leverage himself by working solely on growth because he can delegate everything else out. the other guy doesn't have that luxury.

how much could both these guys accomplish in an hour?

that is one definition of leverage to me.

 

[MJ DeMarco]

I use the word "leverage" in terms of how much force one could exert against an opposing force.

Ex: Limited leverage = you have limiting force.

 

[Nubiwan]

I use the word "leverage" in terms of how much force one could exert against an opposing force.

Ex: Limited leverage = you have limiting force.

Not sure that is an accurate metaphor for leverage. In fact, almost exactly what leverage is not.

I can use a lever to lift a large boulder out of a hole. The boulder might weigh more than I do, but the lever allows me to use limited force to get the work done.

In business terms, leverage is the amount of limited force (time, resources and money) you need to put forward in order to achieve a larger ROI.

That is limited leverage = increased asset value = increased ROI

 

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[MJ DeMarco]

Not sure that is an accurate metaphor for leverage.

Ok champ, you win.

Thanks for telling me how I used the word leverage in my book.

I'll make sure I change it next time it goes through a major edit.

SMH.

 

[rocketgt]

I use the word "leverage" in terms of how much force one could exert against an opposing force.

Thanks for clearing that up, MJ. I wanted to understand what it meant in the book but couldn't quite figure it out from context, especially when used as a noun.

I'd also like to thank the others who shared what leverage means to them. The word clearly has a wide range of definitions depending on what discipline you're in.

 

[rocketgt]

Its not FastLane, but it is real cash, from proven processes that have been around for years, and not pipe dream (get rich quick). I should write a book.

You should have a TV show on HGTV! I think most of their programs are filmed in Toronto. The closest thing they have to what you do is "Flip or Flop" but that's set in California.

My proviso is that I live in Canada where house prices have remained relatively stable throughout the recent crises in the US market.

I live in Hawaii, where the value of land always goes up regardless of the US market. They say your home is not an asset but, damn, I've made decent money in real estate without even trying. I made almost a million dollar profit on my last home and my new home has already appreciated about half a million. Some years my house earns more than I do.

 

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[Filipe]

I'd also like to thank the others who shared what leverage means to them. The word clearly has a wide range of definitions depending on what discipline you're in.

I actually see all these different meanings converging at some level, and believe leverage can be defined relatively precisely.

The word leverage, in physics, is associated to the distance of a force to the fulcrum. The bigger this distance, the more torque you produce.
In basic terms, torque describes how much a force applied on an object causes it to rotate (torque = force applied * distance between point of application of force and fulcrum).
So, for the same force, the bigger the distance mentioned (the leverage), the bigger the rotational effect produced.
This is somewhat of a precise definition, if you make it a bit more abstract: Leverage is the scale factor between impacts and efforts:
Leverage = Impact/Effort

Business owners have way more leverage because, for some more hours a week, they can potentially make millions more. They also control the efforts of lots of other people. For the same effort, they can produce way more impact. Not so for an employee, as folks pointed out.
In finance, too. Investopedia defines leverage:
"Leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment." - again, the idea underlying this definition is the augmentation of the output/input ratio, in this case ROI, using financial instruments as the scale factor - as leverage.

 

[Nubiwan]

Ok champ, you win.

Thanks for telling me how I used the word leverage in my book.

I'll make sure I change it next time it goes through a major edit.

SMH.

OP was asking for a definition of leverage. What I offered were examples.

 

[wade1mil]

You don't have much leverage in a job no matter how good you are. You can't control how much you get paid because that is predetermined by your boss.

Leverage in this scenario is, "I have pictures of you sleeping with the CEO's wife."
Now give me a raise, otherwise the pictures will show up on the CEO's desk and you'll be fired.
That's leverage.

 

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[MJ DeMarco]

OP was asking for a definition of leverage. What I offered were examples.

In the context of Uncontrollable Limited Leverage and Controllable Unlimited Leverage, what exactly does the word "leverage" mean?

In the context

Not exactly.

OP asked what leverage meant in context to how it was defined in my book -- CUL/ULL.

You provided a definition with respect to how you see it, not with respect to how it relates to a book you didn't read. Nonetheless your definition is true in a RE context as well as other things,RE, options, currency trading, et. al.

In either case, my apologies for being curt. Welcome to the forum -- our "safe zone" from the unwashed.

 

[Nubiwan]

Not exactly.

OP asked what leverage meant in context to how it was defined in my book -- CUL/ULL.

You provided a definition with respect to how you see it, not with respect to how it relates to a book you didn't read. Nonetheless your definition is true in a RE context as well as other things,RE, options, currency trading, et. al.

In either case, my apologies for being curt. Welcome to the forum -- our "safe zone" from the unwashed.

Sorry, was not attempting to offend either. Just ordered TMF . Will start reading tonight, and looking forward to it.