Real Estate Investments 101 – Using Leverage to Make a Profit

Real Estate Investments 101 – Using Leverage to Make a Profit

When it comes to saving money through real estate, leverage is an important aspect. We have worked with a number of real estate investors who fix or flip residential non-owned properties use financing to leverage how they make money.

Here is how the process usually works. Let’s say that a typical real estate purchase requirement is a 20% down payment. This would come up to a $100,000 on a $500,000 asset. In a case such as this, the majority of the financing is being provided by the lender while the buyer uses a relatively small percentage of his own funds to buy the property in question. Now let’s assume that the property appreciates at 5% every year. This means that the borrower’s net worth from the purchase will grow to $525,000 on a 12 month period. Now picture the impact of leverage over the course of twenty years. Chances are that you just saw loads of profitable opportunities in the horizon. This is also why real estate investors who use leverage also call the process using “other people’s money.” While borrowing to buy properties does increase your risk it has the potential to increase your earnings especially when it comes to rental properties. Here are some ways we and our clients have leveraged their investments with borrowed money –

HOME EQUITY

Real estate investors have been known to use their existing homes to buy new ones. How? Some of our clients use funds from secured lines of credit on their existing homes which serves as a down payment for their investment properties. How much an investor pays depends on his exit strategy, objectives and how the property performs. For example, if the cashflow from, say a rental property is positive all year long and it is located in an ideal neighborhood there is considerable potential for profit.

A WORD TO THE WISE

How your chosen property fares depends on the property market which is why it is imperative that you choose the right properties; preferably ones that are located in good neighborhoods. For example, using leverage for rentals would include properties that –
1. Have the highest monthly cash flow
2. Has a history of good tenants that pay their rent on time
3. Has excellent potential for equity appreciation

Remember; the higher the appreciation the greater earnings will you receive from your leveraged investment.

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