Three ways leverage can boost your returns - MoneyWeek investment tutorial
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- Опубліковано 21 лип 2011
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Why do you include A's cost in the profit but ignore B's deposit. It's not a 200k profit if you subtract the original 100k too
A invest 200k and receive 300k upon selling. Therefore earn a profit of 100K, ROI = 50%
B invest 100k + loan 100k and receive 300k upon selling. Therefore after paying off loan (assume no interest charge), earn a profit of 100k, but ROI = 100%
In these scenario - B via the leveraging bank loan technically make higher ROI.
It is common & acceptable to make some mistakes sometimes - I love Tim's presentation and had been follow his many videos
Am I missing something in the math? Buyer "B" will have 200,000 after paying off the 100,000 loan but 100,000 was his original investment leaving a profit of 100,000?? hmm
But how much did he invest in each scenario?
in the boom market i think they both A and B make the same profit of a 100k. The difference i beleive is that A made 100k with a 200k investment where example B made 100k with a 100k invesment because the bank had the remaining money. If they both sold shortly after buying then. A=50% profit where B=100% profit. They both made the same profit but with B did it with less aquities. Please correct me if im wrong
Exactly! Thank you!
But you not r talking about return on capital employed
The interest that was paid to the mortgage was not included in the calculation so how can we say that taking loan is better than paying cash to buy the 200000£ house. May I know why?
I think because you can get with half the investment the same profit, technically if the cash of both is 200000 and the second found a third house that is the same and he does the same thing he did before (taking another loan and than selling it again) the first guy would have invested 200000 with a profit of 100000 and the second would have invested 200000 with a profit of 200000
Proguitartuition - in the bull market example, B sells the house for £300k, pays back the bank the fixed loan of £100k and walks away with £200k. That's doubled the money put in to the property initially. A walks away with £300k (no loan to pay off) which is a 50% return on initial equity. So gearing enhances return on investment if prices rise. Hope that helps. TIm.
does that still make sense if you've paid off the loan? or partially paid off the loan? this example seems to only work if he sold the property the same month he bought it and never paid off that interest-free, zero-fees loan. not quite a realistic example?
Tim i appreciate a lot your tutorials but here you have a big mistake at min 4...
on col b you have to substract both the loan and the cash input from 300 k (value of home in bull market)and you arrive to same profit 100k as in col a.
Another point to clarify is that profit is usually a term used in income statements ,but loans in income statement are usually excluded form the calculation..
Thanks for clarifying and correcting..
Your videos are the best! I just want to point out something but I stand to be corrected. In the bull market example, "both" A and B should make a profit of 100K but looking at it from a return on equity standpoint, B would be making a better return? Please clarify and let me know. Cheers
how bout the interest of the loan. of B investor. :( , DFL = Ebit/Ebit-interest,
He is making a point. Is an academic basics that you hold all things "constant" in order to make a pure comparison. Of course some factors like interest will vary the results. But even then with typical rates, you still make more money putting less money in. You might have to hold it longer, but you still make more.
Hi, Could you reply to make money trading stocks? "For the house examples you gave. they have the same profit. because you forgot that the person who buys the house with leverage example b has to pay the 100000 back. so typically they have the same profit. Another important thing you did not mention is that the person in example has to pay interest rate for many years thus his profit is less than example A. thanks"
brilliant. thank you.
Payed for house: 100k
Loaned for house: 100k
House price: 300k
Costs: 100k(house payment) + 100k(loan) = 200k
Net profits: 300k(profits) - 200k(costs) = 100k (not 200k as you said in the video).
If you're not going to factor initial house payment costs then investment A made 300k.
This is pretty basic maths.
By profit for B he probably meant revenue. Then of course private revenue of 200K in terms of the 100K private investment generates 100% ROI as he stated.
agun17 House-owner B had a higher profit margin than House-owner A.
B had a %100 profit, A only yielded %50 profit.
he just worded it weirdly, He said that you're still carying the loan (so you never paid that loan) it's as if you sold the house again the day after you bought it. So you only paid 100,000 and sold it for 300,000 . It's like when I bought a car on a loan for 10K but I only drove it around for 12 months and sold it. I ended up paying 2.5K for the car and selling it again for 10K. so. instead of me buying the car for 10K then selling it a year later for 10K.
Old but EXCELLENT!!!!
Your videos= Educational, yet entretaining. You had me learning and rolling out of my chair all at the same time! Well done!!!
hope you didn't die
awesome videos!
He has very neat handwriting. I like that.
love your photo
Add the interpretation on B for the time period
Thanks
I love your videos, but i think this is oversimplified as you still need to pay interests on the loan, so how it could be that profitable, could someone help me understand more?
I do not understand this concepte. How is B strategy better off than A, given that B is still oweing 100, also is it possible to sale a property that is not completely yours as in the case of B.
B was able to generate the same profit with half as much capital. If A had followed B's strategy (buying two houses, for example), then he'd have made 200k instead of 100k.
he's definitely on his A game for sure.
Hmm, not so sure about this, in the first example in the bull market they both only come out with 100k as B has to pay back the bank, which you don't mention for some reason. You do mention it in the bear market example, and despite your statistical analysis seeming logical, A losing 50% B losing 100% they both only lose 100k so the real world difference seems meaningless.
He didn't "forget" the 100k debt. Yes, in practice the two scenarios are the same. However, in financial terms, you don't count the 100k, since it's just an obligation owed to a lender. You own the actual money you borrow. Therefore, in terms of financial theory, you do get a higher return on investment B.
A better practical example, in order for the idiots to understand the theory, would be that A buys the house for 200k. B, knowing he is in a bull market, borrows loads of money and buys a house for 800k. After the increase in market price, when they both sell their houses, B can repay his debt and net a sweet profit. That's how we normally visualise it. But from a theoretical point of view, his explanation is actually more illuminating.
What about the 2nd example? A is left with 100k in cash, but if B made 100k on the sale and also has his original 100k leftoever with a 100k loan, isnt he still leftoever with 100k?
I'm guessing he never paid that 100k loan. It's as if he sold the house the same month he bought it? coz in reality if he had a 100k loan you pay interest on that loan fees, and probably would have ended up spending 250K and selling at 300k. dunno.
i c, so... u decide not to pay back the bank in order to make more profit? got it! so every time i do your lesson preached, i will have to immigrate to another country to avoid banks suing me lol
Home loan can leverage your returns vs full paid up capital. See.
hleo2601 - thanks and sorry it's taken me a while to get back to you. In short what you are saying is that pure profit and return on equity are different things. Correct. For an equity investor return on equity matters more (see my video on return on equity for more). Tim.
I wonder if when he watch his video over after making it. How are you teaching. Says this can destroy your wealth. Forgets the 100grand he put down on the house. "A" for effort immediately stopped watching
simple there is good lending and bad lending
I borrow but I will only borrow with a 30% deposit and a yield of 9%
My head hurts.
Mortgage let's say 10%
So I get 190000-100000
=90000
Which means 1.9x or 90% profit still better that option A
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dude you are full of the nonsense what happened to the 100k we put down? the results is the same in both cases
Not from a percentage point of view. Going from 100k to 200k is a bigger increase than 200k to 300k.
come on wake the f up