There are several common buzzwords or topics you may hear about in the real estate world, and one of the most frequent is “leverage.” Especially among real estate investors of various types, leverage is a vital concept to consider while looking to be as profitable as possible through your real estate ventures.
At Fox Financial, we’re here to help with several real estate investment solutions, from passive real estate to investment property purchasing and many other areas. Leverage is a frequent topic we discuss with our clients — what exactly is it, what types of leverage do real estate investors regularly capitalize on, and what else do you need to know in this area? This multi-part blog series will go over all the basics.
Real Estate Leverage Basics
Within the world of real estate, leverage refers to an investor’s ability to use money that is not their own to generate ongoing income. Buying a rental property, for instance, involves utilizing a mortgage lender for 80% or more of the purchase price — this is a form of leverage, because you are using other people’s money to buy a property, but it is not the only form.
You can also frequently find leverage in terms of equity — for example, say you buy a rental house for $100,000 cash, and then immediately put an additional $20,000 in renovations and make it more attractive to tenants. The property could now be worth $120,000 — if you were to sell it right away, you would have paid $20,000 less for the rental than what you’d earn in appreciation (and potential rental income) over time.
Leverage in real estate contrasts sharply to a field like the stock market, where leverage is much harder to come by. This is why it’s important to take advantage of.
Benefits of Leverage for Real Estate Investors
Leverage brings two major benefits to real estate investors:
- Greater returns: Leverage improves your cash-on-cash returns in many real estate situations, leading to more money in your pocket. For example, if you have $10,000 and can find an investment property valued at $100,000 that returns 10% on your money, then with no leverage you’d receive $1,000 at the end of year 1. With 25% down ($25,000) on a leveraged purchase of the same $100,000 property, you’d receive $2,500 at the end of year 1 — a 50% boost to your returns.
- Less upfront capital, and therefore ability to scale: Leverage allows you to buy more with less cash out of pocket. With enough income sources and an established credit history, leveraging real estate purchases is much easier than many people realize — and this allows you to scale up your real estate portfolio without putting a huge strain on your own personal finances.
In part two of our series, we’ll go over some of the most common types of leverage in real estate and how to use them to your benefit. For more on this or any of our real estate investment or rental property services, speak to the team at Fox Financial today.