The Beauty of Leverage in Real Estate Investing

By Dan Valentine

Savvy Real Estate Investors have learned the art of leverage to enhance their Real Estate Investments for many years. The ability to control a $200,000 home for $10,000 or $20,000 down is a miracle in itself, thanks to the United States outlook on high leverage financing. Not so in many countries. Simply put if the appreciation is $12,000 (6%) on a $200,000 home and you paid cash for it, your return would be 6% on appreciation only. If you only had $10,000 in it the return would be a whopping 120%. Yes, this is simplified, but proves the point. Of course you have to pay the loan back with monthly payments. Thus we bring in the tenant who pays a great portion of the payment on your behalf in exchange for using the property. How much of the payment the tenant pays depends on the market, the home, the location, etc. Many variables, but in declining markets will the negative cash flow (rent less expenses and payments) of a rental even come close to the appreciation. Even if it took half the appreciation the return is still 60% in this example.

If you took the same $200,000 that returned 6% on the home and purchased 10 homes at 10% down (leverage) the simple return on appreciation alone is $120,000 instead of $12,000 on the same $200,000. Leverage is an incredible tool when used wisely.

One step even better is when you pull idle equity from a home or rental property and use that to purchase the next investment, that is 100% leverage. You literally have a “0” down investment since the money was moved from another property. The ability to do this has been sitting in your idle equity for years.

Dan@Valentineteam.com