Using Real Estate Leverage For Wealth Building

Real Estate Leverage is simply the used of borrowed money used in purchasing real estate. Equity is the amount of money that the real estate is worth above the amount of money owed. For example, let’s say that you have $100,000 available to invest in real estate and the average price of a home in your area is also $100,000 and the average rent for that home is $1,000 per month just to keep the numbers simple.

You could purchase one home for $100,000 cash and then rent it out for $1,000. This would give you a return on investment of 1 percent per month 1,000 / 100,000 = .01) or 12 percent a year. The average real estate appreciation since 1968 has been 6.34 percent per year. Some years it is less and some years it is more, but for this demonstration we will use 6 percent to keep it simple. Add 12 percent and 6 percent and you will have an 18 percent Return On Investment (ROI) for your $100,000. Not a bad return and much better than you would get at a bank or deposited in a CD.

Now let’s add leverage into the equation. If you purchase the same home with only 10 percent down ($10,000) with an interest rate of 6 percent then your Return on Investment would look like this. $1,000 rental income minus $450 interest divided by $10,000 down payment for a return on investment of 4.5 percent per month or 54 percent per year plus 6 percent in appreciation is equal to 60 percent ROI per year. Remember you only used $10,000 of your own money and you leveraged $90,000 and your profit per year would be $6,000.

Since you still have $90,000 in case available you could purchase 9 more homes. Then you would still have a Return On Investment of 60 percent but your profit per year would be $60,000 instead on $6,000 and you would also have leveraged $900,000.

I have not discussed taxes, maintenance, insurance or any other expenses associated with owning real estate. The expenses would be proportional for each home that you owned whether it is one home or ten homes.

The amount of money that you get from your real estate investments is always offset by the amount of debt you have; rent checks from tenants need to go toward mortgage payments and other debt. With real estate leverage it’s important to make sure that the income generated from real estate is enough to cover the negative cash flow of the real estate debts during the bad times. Renters can and will damage properties, vacancies will happen from time to time.

If you finance with a variable interest rate mortgage or if the tax appraiser raises the value of several of your homes, you could be in a negative cash flow within just a couple of months with no way out.

Investing in real estate without significant cash reserves is, shall we say, not recommended. An investor without reserves might as well send an engraved invitation for disaster. Investing in real estate is a daunting task. There are hundreds of elements which must come together in harmony for a transaction to close.

Using real estate leverage is a great way to increase your own personal wealth and to build a large and healthy portfolio if it is done wisely. The more real estate leverage you have the more property you can acquire by using this debt or leverage.

It’s not difficult to understand the concept of real estate leverage and if used properly can not only make for sound investments but can also make for a healthy financial portfolio.

Real Estate Investing is Simple But It’s Not Always Easy

I watched my husband sprint off as if he were a contestant on The Amazing Race, only this was the real estate version.

We’d spent months touring different properties, conducting market comparisons and studies; finally we’d found two properties that met our objectives. Each property was in decent condition and priced to sell. We were excited to find two good potential deals.

Our plan was to purchase both of them (one single family home and a duplex). The plan ran smoothly at first, until a problem arose with our investment partner.

In the beginning we thought we could quickly sidestep this glitch by simply acquiring new partners. The dilemma: any potential partners would have to decide right away since there was only 48 hours left. It may be easy to decide to invest $500 in a weekend, but $50,000 takes a lot more finagling to make happen. My husband I decided to attempt to make it happen because we believed wholeheartedly in the potential of the investment.

For two days straight we made phone call after phone call looking for someone with the interest and the means to go in with us on these deals. At the end of the 48 hours we were ecstatic…we’d found two new investors willing to join us.

Next step: put together the financing.

Along with my husband and I, we had found a medical doctor and a veterinarian to partner with us; with some high income and high net worth individuals on our team we assumed securing financing would be a piece of cake – we were very wrong

I started out by saying it, and now I’ll say it again:

Investing in Real estate may be simple, but the process is not always easy.

I always get disturbed at these infomercials which promise people “instant riches” through real estate investment. These unsuspecting individuals buy videos and books and attend seminars thinking that with little effort they’ll be able to become a millionaire real estate tycoon- this is far from being true.

So back to our story: Dave, my husband, was in a race against time trying to get to his destination. See, when we got our partners was when the real problems began. Neither of them qualified for loans to purchase the properties. At this point the only thing left to do was ask for an extension, which we received (only 4 days), and set out on our next quest: we needed to secure private financing – so we headed back to the phones!

For 4 straight days we called everyone we knew looking for the necessary funds. When it was over we had what we needed, except there was still one problem. The cheques needed by over 7000 kilometers away in Kelowna, BC. Unfortunately we were in St. John’s, Newfoundland; we had 48 hours to get the cheques there in time.

After doing a lot of checking we realized that our options were limited. In the end we decided see if we could take the cheques to the Post Office in order to get them delivered the next day, which was our deadline day.

It turns out that we had less than 30 minutes to get to the Post Office before the courier departed for the evening. Seeing as this was our only option, we thought we may have to say goodbye to the overnight shipment option.

This is where we pick up the story with Dave making the mad dash to the post office. Thankfully, he made it in just the nick of time.

I will admit that every deal is not filled with so much suspense and drama. However, the lending landscape has changed dramatically in recent months and financing your investments is going to be very challenging. Those looking to invest in real estate will find the many of the financing programs which used to be available have gone away. Both conventional and private lenders can be really strict when it comes to protecting their investment capital.

Disappointment and let downs are a natural part of the real estate investment game; if you are easily discouraged, pick a career with less risk. You have to be persistent to succeed in real estate investing.

The reality is that both the veteran and inexperienced investor make the mistake of thinking real estate is the way to ‘get rich quick’. The truth is that real estate investing is a great way to get rich, but there’s work involved!

Real estate investing is quite simple. By following certain tried and true strategies you will certainly experience success, if you don’t give up. But, it’s not easy. Anything that sounds too good to be true probably is.