Leverage definition: 1. use borrowed capital for (an investment), expecting the profits made to be greater than the interest payable. 2. use (something) to maximum advantage.
In real estate, we leverage wherever we can. We leverage our money by using the bank to finance on average 75% of each acquisition & the tenants pay down the mortgage, while allowing for a net positive amount each month after all expenses so our investors get a return right away (CASH FLOW, BABY)! We leverage knowledge by partnering with others who are more advanced in certain areas of real estate than us or using mentors who have done more & bigger deals than us to avoid making mistakes (see previous posts before we figured this out)! We leverage our time by hiring virtual assistants (real people in other countries who help us with book keeping, pre-lease screening, lease management, IT aspects, etc.). Leverage is a POWERFUL tool when deployed correctly.
This is a mindset shift for many people who think owning something 100% outright will produce the maximum returns. This is NOT true in real estate. Objectively this becomes very obvious with an example. If you have $100,000 to invest & you buy a $100,000 house outright, you have 1 house. Say you rent this house out for $1,000 a month (1% rule meaning your property should rent for at least 1% of what you bought it for, though we aim for much higher than this rule). So, each month, you get a $1,000 check (before you account for expenses).
Now, say you use that $100,000 and put $25,000 into the down payment for 4 separate houses (this is the typical “25% down” for investment properties, or 75% LTV (loan to value), though we can use creative finance to bring even less down up front therefore buying even more with our and our investors’ money. Now, you own FOUR properties, each bringing in $1,000 a month for $4,000 total a month (again before you account for expenses). You have 4x the income from the same amount of money.
This is just the tip of the iceberg. There aren’t enough characters left in this post to get into tax benefits (you can deduct that mortgage interest which you can’t when you own it outright), depreciation (the government lets you deduct everything from the building structure to appliances and carpet), value-add to cash-out refinance 100% of that $100k you put in to recycle the money (this is the VELOCITY OF MONEY), appreciation (you can’t make more land – house values go up) & on and on! I just love real estate! It’s a real, tangible object. It does not drop like a rock like the stock market (yes there are cycles, but that is why you buy right and for cash-flow). It is not good to keep all of your eggs in one basket - DIVERSIFY WITH REAL ESTATE!
Lesson: Partner with others who are experienced in real estate and will lead you to invest RIGHT and not OVER leverage.
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