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Real Estate Investment: Leverage

August 17, 2016

Are you tired of the 9-5 grind and not achieving your full financial potential? Are you in need of a boost to help give you additional means to pay your car bill, education loans, credit card debt, etc.?

Wondering how the rich seem to get richer, while the working middle class works the hardest with practically very little to show for it in the end? 

 

What if I were to tell you that there is a way out of the repetitive rat race of morning commutes, office drama, politics, and headaches? A short cut of sorts, that EVERYONE can take advantage of. It is the fast track towards financial independence and freedom that can open up many opportunities and make your life much more fulfilling and rewarding.

 

What I am talking about here is investing in real estate! Real estate offers countless benefits that are practically at your finger tips. Over the next few weeks, I will discuss some of the benefits associated with investing in real estate. This week, the first two benefits to cover are access to capital, and leverage.

 

Access to Capital

There are many ways to skin a cat (i.e. become your own boss and control your own financial future). You can start up a business, you can try your luck in the stock market, you may inherit money from your family, etc. But for the average Joe, we aren’t set to inherit tons of money from our family, we tried the stock market but we’ve ended up with average 7-8% returns, maybe some of us have great ideas, but we don’t have the connections and/or the network to adequately fund our business ventures.

 

Raising money to purchase a home is relatively easy for the vast majority of people and in some cases can be shockingly affordable. Depending on the type of loan you get (FHA, Conventional, VA), you may be able to pay as little as 3.5% down at an interest rate of 3-4%. So, for example, for $10,500 down you could control around $300k.

 

The reason why having access to capital is so important is because it takes money to make money. And if you are the average Joe, you don’t necessarily have a lot of money. In other words, you need to leverage other people’s money to make you money. This brings us to the next benefit of investing in real estate, leverage.

 

Leverage

Let me ask you a question. If you had $100k today that you had to invest in real estate, what would your financing strategy be? Would you buy a $100k property outright (100% equity, no debt), or would purchase multiple properties through financing (20% equity 80% debt)?

 

Many people would say that they would rather purchase the property outright because it is less “risky” then having to deal with a fixed monthly payment that they may not be able to pay down the road. However, I would argue that a healthy level of debt gives you flexibility to grow faster and build more wealth over your lifetime.

 

Leverage is a strategy of using borrowed money to generate large investment returns. It gives you the ability to purchase more than you otherwise would have been able to on your own.

 

For example, consider a real estate investor who has $100,000 in cash. That investor could use that money to buy one home valued at $100,000. If that home appreciates by 5% the investor would have gained $5,000 (a 5% return on investment). If that same investor used the original $100,000 to put a 20% down payment on 5 different homes valued at $100,000 each, and then sold all 5 homes after the 5% price appreciation for $105,000 each, the investor’s profit would have been $25,000 – a 25% return on investment.

 

As you can see, leverage can be a very powerful tool to use in your journey towards financial freedom and independence. However, it is important to find the right level of leverage for your given risk tolerance and financial situation. Too much leverage could put you in a perilous situation if things don't go your way. 


Thanks for reading! Stay tuned for further articles on the benefits of investing in real estate. Next on deck: tax benefits and cash out refinancing.

 

Kevin Barbera
 

 

 

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