Lets look at the 2 most important financial principles that will guarantee you become a Set and Forget property millionaire.

The first is Leverage, it is the lesser of the two but means that we can use the second much more effectively.

Leverage from a property perspective means borrowing capital to invest. It will take the form of either a mortgage, personal loans, credit cards. I will leave the last 2 out and focus exclusively on the mortgage aspect.

A mortgage represents huge capacity for leverage.

Say you had saved £10,000 assume you could buy a property with this and that property after a year was worth £20,000. You have made £10,000 or 100% return on investment.

In this example you have not used any leverage.

Now lets say you took that same £10,000 and went to a bank and borrowed £90,000 at 10% interest rate. Then using the £10,000 and the amount borrowed you bought 10 properties with your £100,000.

At the end of the same your each of your 10 properties has doubled to £20,000. You have just made £100,000 less interest of £9,000 (£90,000 x 10%) so £91,000.

So without leverage you made £10,000 and with it you made a cool £91,000.

Hopefully you can see why leverage is such a great facility.

The second and more powerful concept is Compounding. Albert Einstein said of compounding that it was the 8th wonder of the world. I am inclined to agree.

Compounding works like this, you invest £1 as a child and each year you are paid 10% interest. So at the end of:

» Year 1 - £1.10
» Year 2 - £1.21
» Year 3 - £1.33
» Year 4 - £1.46
» Year 5 - £1.61
» Year 10 - £2.37,
» Year 15 - £3.83,
» Year 20 - £6.16,
» Year 25 - £9.92,
» Year 30 - £15.98,
» Year 35 - £25.74,
» Year 40 - £41.45,
» Year 50 - £130.08

<>

Now think for a moment if you added £1 at the end of each year. The results would be outstanding:

» Year 10 - £20.12
» Year 20 - £69.73
» Year 30 - £198.39
» Year 50 - £1,397.69

You will notice that what would have taken 32 years will now take just 10 years. Then think about after 50 years the results are amazing. £130 versus £1,397.

You will notice that in the first few years you will not notice much effect but as the years go on the effect is massive.

The reason compounding works is best explained in my all time favourite book on finances. The Richest Man in Babylon by George C Classon.

How therefore may we put our gold to work?; My first profitable investment was a loan I made to a man named Aggar, a shield maker. Once each year did he buy large shipments of bronze brought from across the sea to use in his trade. Lacking sufficient capital to pay the merchants, he would borrow from those who had extra coins. He was an honorable man. His borrowing he would repay, together with a liberal rental, as he sold his shields.

Each time I loaned to him I loaned back also the capital increase, but its earnings likewise increased. Most gratifying was it to have these sums return to my purse.

I tell you, my students, a man’s wealth is not in the coins he carries in his purse; it is the income he buildth, the golden stream that continually floweth into his purse and keepth it always bulging. That is what every man desireth. That is what thou, each one of thee desieth; an income that continueth to come whether thou work or travel.

Great income I have acquired. So great that I am called a very rich man. My loans to Aggar were my first training in profitable investment. Gaining wisdom from this experience, I extended my loans and investments as my capital increased. From a few sources at first, from many sources later, flowed into my purse a golden stream of wealth available for such wise uses as I should decide.

Behold, from my humble earning I had begotten a hoard of golden slaves, each laboring and earning more gold. As they labored for me, so their children also labored and their children's children until great was the income from their combined efforts.

If you would like a simply definition - Compound Interest is the interest which is calculated not only on the initial principal but also the accumulated interest of prior periods.

Understand and use both these concepts and you are a huge step towards that armchair.

Live with passion,

Brett Wood