LEVERAGE (HOW TO USE IT PROPERLY)
Leverage is one of the most powerful tools that investors use to acquire larger properties, increase their returns, and scale their portfolio faster to build net worth. Allowing real estate investors to accelerate their returns by reducing the amount of money they personally invest is one of the main advantages, while reaping 100% of the rewards.
USING OTHER PEOPLE’S MONEY
Multifamily property investors typically use a down payment which is a percentage amount of the purchase price and the remainder of the purchase comes from what is affectionately known as “other people’s money”. Other people’s money is the borrowed portion of money usually in the form of a loan from private lenders, banks, or institutional mortgage lenders.
To better illustrate, let us start by referencing an example from the Los Angeles market. The LA market routinely appreciates at ~6.5% on multi-family property investments based on well-established historical averages for the area. For the sake of being conservative and easier math we will use a 5% rate of appreciation rate. Consider in this example, you were to invest $100,000 in all cash on a multifamily property purchase. After one year, using the same 5% appreciation rate, the investor’s equity would increase by $5,000 to $105,000.
Now let’s look at a plying the use of leverage. As an investor, you can alternatively use the same $100,000 as a 25% down payment on a $400,000 multifamily property investment instead. Under this scenario, using the same 5% appreciation rate, the investor’s equity grows by $20,000 tp $120,000 in the same one year period because the 5% appreciation is on the full $400,000 investment. The return on equity is now 20% instead of 5% by using leverage. Return on equity is calculated as follows: appreciation/down payment, or in our example, $20,000/$100,000=.20 or 20%.
As you can see on unique benefit of real estate investing is the ability to use leverage to magnify your return. This translates into higher cash flow, bigger tax benefits and more appreciation benefits where applicable.
Buckingham Investments can assist you in building a staggering amount of net worth as part f an overall long-term investment plan. Buckingham will show you the techniques to use leverage that won’t dilute your appreciation gains over time and leverage those investments wisely. As equity builds signaling that it is time to re-invest in progressively higher value properties, we are here to assist you. Once you investment goals have been achieved, it is time to sit back and enjoy the cash flow that comes along with it. Imagine the financial freedom that comes along with putting the power of leverage to work for you today!
