While I don’t want to cover overly detailed points in this introduction, I do want to remind you of the unique joy of being able to buy something with only a down payment. When you create your own plan to invest in real estate, all you will need is the amount that a lender will not give you. It could be anywhere from 5 to 35% depending on the market conditions, where you live and what you’re buying. The good news is that a lender will almost always fund over half of the purchase!
What Does Leverage Mean?
Leverage: Using other people’s money (banks, mortgage companies and owner financiers) to make money. Leverage multiplies your profit.
If you buy $10,000 of shares, you pay $10,000.
If you put $10,000 into a savings account, you put in the whole amount.
If you put $10,000 into a new company, again you put in the whole amount.
If you put $10,000 into a pension plan, the government will add to it, but then grab it back at the end and tax you on your annuity.
This isn’t the case when it comes to real estate …
What the power of leverage means is that you can buy, for example, a $200,000 property for anything from $10,000 upwards, depending on the mortgage market and your lender’s terms at the time. The lender granting you a mortgage will pay the rest. Basically, you can get a mortgage on a property, but you can’t borrow money on stocks and mutual funds … that’s leverage!
The Power of Leverage
Let’s use our example from above.
You buy a $200,000 property with a 70% mortgage, which means you have a down payment of $60,000 (or 30%). You own the property for ten years before you decide to sell. At that time, it has doubled in value to $400,000. After you have paid out the loan amount of $140,000, you have a net profit of $260,000. Your initial down payment was $60,000, so you have made over 400% return on your investment.
Also, since you are renting the property, someone else is paying down your loan, and so you are growing your equity at no cost to you. Your net worth is growing because someone is renting your property. Sometimes people say that investing isn’t worth it because they are only netting $150 a month on the rental income, but it seems to be easy to overlook the fact that someone else is paying your loan down at the same time. Every year it improves. As your tenants pay down your mortgage, you eventually own the property, which will increase your cash flow Effectively, you are putting someone else’s money into your savings account every month!
The power of leverage means that there is no better method of investing your money!