Real Estate can be Leveraged
The most important advantage of real estate investing is LEVERAGE! It is the use of borrowed capital to increase the potential return of an investment. In real estate transactions, leverage occurs when a mortgage is used to reduce the amount of investor capital required to purchase a property. The annual return on a $200,000 property with a $20,000 net cash flow purchased with cash is 10%.
Now, let’s assume a loan of $150,000 is amortized over 30 years at 5% interest, but 75% of the money required to purchase the property is borrowed, even factoring in the cost of making the mortgage payment, the annual return more than doubles to 22%.
Once you have built up an equity position in an investment property, you can leverage that investment for cash in one of two ways: Secure a second loan against the increased equity or refinance the original loan amount plus the increase equity. This frees up money to buy another investment property.