Leveraging the Purchase of Investment Properties
Investing in real estate allows you to harness the power of leverage.
Leveraging your money means that you don't have to use your own money to pay for 100% of the investment, instead you get to use other peoples money.
Using other peoples money allows you to get into investments that you otherwise wouldn't be able to purchase and dramatically boosts your return on investment (ROI).
When buying investment properties this leverage usually comes in the form of a mortgage from a bank or credit union.
Typically these types of loans require that you pay for 25% of the investment upfront, in the form of a down payment.
The bank will then cover the rest of the expense, on the condition that you pay them a monthly fee.
The whole goal of purchasing an investment property is to make more in rent than you pay to the bank.
There are more creative types of financing where you get to use 100% of other peoples money to pay for the investment, but beware, the interest charged on these loans is typically higher because of the greater risk to the lender.
Leveraged investing allows you to significantly increase your return on investment.
This can be seen by examining the equation that is used to calculate ROI, ROI = Gain/Purchase Cost.
Therefore, by decreasing the purchase cost to as small a number possible the return goes up.
By plugging in a few numbers you can get a feel on the advantages of leveraged investments in real estate.
Say you purchase a house for $200,000 and three years later sell it for $250,000.
Your return on investment would only be $50,000/$200,000 which equals 25%.
Now, if you'd leveraged your money so that you only paid 25% of the initial costs, or 25%*$200,000=$50,000, your ROI equation would look like this $50,000/$50,000.
This brings your ROI up to 100%.
As you can see, the advantages of leveraging your investment properties is huge.
Leveraging your money can free up your cash to invest in multiple vehicles, thus helping you better to diversify and give you a better overall investment portfolio.
Leveraging your money means that you don't have to use your own money to pay for 100% of the investment, instead you get to use other peoples money.
Using other peoples money allows you to get into investments that you otherwise wouldn't be able to purchase and dramatically boosts your return on investment (ROI).
When buying investment properties this leverage usually comes in the form of a mortgage from a bank or credit union.
Typically these types of loans require that you pay for 25% of the investment upfront, in the form of a down payment.
The bank will then cover the rest of the expense, on the condition that you pay them a monthly fee.
The whole goal of purchasing an investment property is to make more in rent than you pay to the bank.
There are more creative types of financing where you get to use 100% of other peoples money to pay for the investment, but beware, the interest charged on these loans is typically higher because of the greater risk to the lender.
Leveraged investing allows you to significantly increase your return on investment.
This can be seen by examining the equation that is used to calculate ROI, ROI = Gain/Purchase Cost.
Therefore, by decreasing the purchase cost to as small a number possible the return goes up.
By plugging in a few numbers you can get a feel on the advantages of leveraged investments in real estate.
Say you purchase a house for $200,000 and three years later sell it for $250,000.
Your return on investment would only be $50,000/$200,000 which equals 25%.
Now, if you'd leveraged your money so that you only paid 25% of the initial costs, or 25%*$200,000=$50,000, your ROI equation would look like this $50,000/$50,000.
This brings your ROI up to 100%.
As you can see, the advantages of leveraging your investment properties is huge.
Leveraging your money can free up your cash to invest in multiple vehicles, thus helping you better to diversify and give you a better overall investment portfolio.
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