Using Debt also known as leverage is not always bad! Especially when using it for real estate investments.
Leverage is a very powerful tool that you can use as a real estate investor. Using leverage allows you to increase your buying power and maximize returns.
Leveraging simply means utilizing borrowed capital (debt) to make an investment.
As an investor, you want your profits from owning & operating the properties to be greater than the debt service & expenses.
If you buy right, you can cash flow on these properties after all expenses. You will only need to put down 20% down for single family investment homes & finance the remainder.
For example, if you had $100,000 cash and the property you were looking to buy cost $100,000, you could pay for it all cash & have no money left. All of your money would be tied up in this one deal.
However, by taking advantage of leverage, you can buy 5 – $100k homes with the same $100k by putting $20,000 (20%) down on 5 separate single family homes.
Who wouldn’t want to buy more with less money?
Of course, you will have mortgages to pay by using leverage, but if you buy right, you’ll still have cash flow and risk diversification in addition to the fact that your tenant’s will be paying down your mortgages.
You also experience 5x the gains in property price appreciation. If the 1 property goes up 20%, the asset value is $120k.
If the same occurs with the 5 properties, your asset value is $120k x 5 or $600k. As you see, by spending the same $100k capital, with leverage, you gain $100k in equity vs. only $20k by paying for the one house all cash.
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