Many times we hear that a personal home isn’t an investment. However, it’s probably the largest transaction a person will ever endeavor. The alternative is to pay someone rent and have nothing working for you. A home purchase involves the commitment of upfront money so it is an investment; one that should be carefully researched and planned. Let me describe for you the power of Real Estate leverage.
Leverage is defined as using something to gain maximum advantage. From our physics class we remember the classic example of a lever being used to move a large rock or boulder. The lever would be placed under and against a rock and exertion applied downward on the lever to move the object. In Real Estate the lever is the money and the rock or boulder is the house. The amount of money you invest determines the amount of leverage you are applying for your advantage. As long as the payment is comfortable, you should always invest the least amount of money possible. The power of Real Estate leverage is buying power and buying power leads to greater wealth opportunities.
Let me break it down using an example. If you have $10,000 in the bank and you’re getting 1% rate-of-return you’re getting $100 and your account is worth $10,100 at the end of the first year. How can I use that $10,000 and maximize the advantage? If I’m looking to invest in a $100,000 house and use the $10,000 to purchase the house (down payment, closing costs, etc.) I now own a $100,000 house and a 1% increase in value makes this house worth $101,000. That $10,000 investment created a return of $1,000, a rate of 10%; ten times what a CD or savings account would pay. The $10,000 investment is the lever and the $100,000 house is the rock or boulder that I’m moving. This is the power of Real Estate leverage; leveraging a minimal investment to create maximum wealth. Which would you rather have; $10,000 making $100 over a year; or that same $10,000 leveraged into a huge $100,000 investment? You have to live somewhere so why not invest and enjoy the power of Real Estate leverage.
B.B.A, Real Estate Finance
Selling Real Estate since 1992