Leverage may
quite possibly be the best aspect of real estate Investing.
It is Simply the Ability to use Other People’s
Money. (OPM)
When we borrow money from the bank
or other sources to purchase Real estate The Borrowed
money all becomes Leverage.
Example we purchase a $200K property
(we put $10K in for down payment and the bank lends
you $190K. As that property appreciates at 6% (30
year average) a year this is an increase of $12K.
(200K x 6% =12K in appreciation and a new Value of
$212K). 12K from a 10K investment is a 120% return
on our $10K investment for just the first year,
The second year appreciation is now
based on a 6% appreciation of the $212k
($212 x 6% =12,720 in appreciation) a new value of
$224,720. This continues to multiply year after year
all from your initial $10k investment.
Return on Investment (ROI)
Leverage combined with a great exit strategy makes
for a great ROI
Structuring the purchase:
This is a critically important early step; having
an exit strategy in place before you purchase will
allow you to get a loan to maximize your ROI. For
example if your exit statagy is to hold for 1 or two
years you can acquire a loan with a much lower interest
rate such as a MTA loan which may be as low as 2-4%.
This will increase your cash flow and is used in the
markets where there is high appreciation and a short
hold is planned. These loans should never be used
with long term holds as they adjust often and investors
are unable to forecast there ROI.
