The real estate market is one of the most rewarding industries a person can get involved in. It is one of the few investments that a person can actually use someone else’s money, to make money for themselves. To maximize the investment and make it work for your demands knowing how to effectively leverage money. Leverage is one of the most critical factors in having a successful real estate investing experience.
What is Leverage in Real Estate?
Leverage in real estate is defined by using a small portion of your own money to get more money from others (mainly lenders) to purchase an investment. The borrowed funds are then used to purchase an investment that generate higher returns than what is charged by the lender. The basic theory behind leverage is that someone can put a relatively lower amount of capital as a down payment and use the borrowed money to invest or buy a much more expensive property which will generate higher returns than your relatively lower amount of capital would have. You borrowed money can be used to buy a property that you intend to either flip, rent, or sell at some point to make an even greater profit.
For example, imagine that you wanted to buy a $1,000,000 apartment building that’s generates $50,000 in annual rents. If you had the $1,000,000 in cash to spend you’d be getting a return of 5% on your capital investment. Now imagine if you bought that same $1,000,000 apartment building but only put down $200,000 of your capital and borrowed the remaining $800,000 at 5% APR. Your $200,000 investment will now generate a 25% return on the same $50,000 in cash flow. You’ll of course have to pay interest on the borrowed capital but you’ll be generating much higher returns than you otherwise would have been able to. Beyond these numbers you’ll also disproportionately benefit from the appreciation of the property and its tax benefits relative to the capital use to purchase the asset.
Understanding Equity in Investment Properties
A good definition of equity is the difference between value of the property and the amount owed on the loan of the property. Equity is one of the most important factors in any real estate deal; it will determine what you are able to buy, how much you are able to borrow and will impact many of your investment return metrics.
How to Leverage Real Estate
Leveraging real estate is not as hard as it sounds. All it takes is a little knowledge and financial understanding to make it happen, especially if provided by a knowledgeable and experienced real estate property management team
Consider the following:
- If you buy an investment property for $100,000 and have nothing left to work with after the purchase, then you can expect to have nothing to leverage with.
- Buy an investment property with the $100,000 you have in cash with a loan from a lender and now you have what experts call 50 percent of leverage.
- With 50 percent of leverage and an increase in property values would mean you have even more money to leverage into other investment properties. This means for every percentage that the market increases means more money in your pocket when the time comes to sell or rent the property out.
How to Finance an Investment Property
There is always a way to finance an investment property. The only question you have to answer is which one is right for you.
- There is a traditional home mortgage path. Simply apply for a traditional home loan with a lender.
- You can choose an investment property loan to buy auctioned homes. Some lenders have low-interest home loans that can be used to buy homes that are up for auction.
- Tap into home equity and apply for an equity line of credit. Use home equity to leverage against other investment properties to maximize your earning potential.
Looking to Make Your Best Investment? Give AllView a Call!
Best advice we can give you is to give us a call! AllView Real Estate Management is Orange County’s premier property management and investment firm. We offer not only exceptional property management, but also real estate investment consulting and management. Call us at (949) 400-4275 or send us an email at info@allviewrealestate.com for real estate investment expertise.