It has been said that you make money when you buy property – and this can be very true. Obtaining real estate for just a fraction of its value is certainly one way to gain immediate equity. But there is also another principle in real estate that can help you in increasing your profits exponentially. This principle is called leverage and real estate provides the ultimate investment leverage.
With real estate, you can purchase – and control – 100 percent of a piece of property by putting only 10 or 20 percent of the purchase price down. Yet, even though you are only putting down a percentage of the purchase price of the property, you are getting to participate in the profits from 100 percent of it.
Leverage is essentially defined as the use of borrowed money to increase your profit in an investment. Building wealth through real estate requires the use of leverage. Using an example, let’s assume that you have $100,000 to invest, and you purchase a small income property for $100,000.
Let’s further assume that income properties have been appreciating at an average of 7 percent per year. Therefore, at the end of the first year, your property would be worth $107,000 and at the end of the second year, it would be worth $114,490.
Now, let’s assume that you instead put your $100,000 down on a $500,000 income property. At the end of the first year, that property – also appreciating at 7 percent per year – would be worth $535,000. At the end of the second year, it would be worth $572,450. By using leverage in order to purchase the larger income property, you would have increased your profit by $57,960 – in just two years!
Compare this with buying shares of stock. If you want to buy $100,000 worth of a company’s shares, you need to give $100,000 in order to make the purchase. In other words, you must pay 100 percent of the asking price.
Leverage can allow for a much greater potential return to an investor – and no other investment strategy benefits from the power of leverage like real estate. It can help to deliver a very nice return on your invested funds – which can in turn allow you to purchase more properties.
The good news is that having more properties does not have to take up more of your time. By using a property manager, you don’t need to deal with the day to day operations or tenant needs.
For more information on how you can take advantage of the tremendous benefits that owning property can provide you – yet without taking up all of your time – contact us.