LEVERAGING A REAL ESTATE INVESTMENT PORTFOLIO (Part 5)
October 7, 2014 By Larry Arth
Leveraging investment is what makes real estate so unique and lucrative. When you invest all cash into a real estate investment, you can get some nice healthy returns. When you want to put your investment dollar on steroids you can leverage your investment portfolio 3, 4 or even 5-fold.
Simply stated, you put money into a property (typically 20% and then finance the other 80%)
Leveraging Your Real Estate Investment – Simple yes, but not necessarily easy.
OK, I understand this may seem like grade school information, many of my clients thought so as well until they learned the need to have great respect for leverage. Understanding leverage is paramount for any successful real estate investor. Leverage can make you lots of money and it can also get you into trouble as many investors found out within the past decade.
Obviously when you borrow money you have to pay it back, so buying investments with leverage requires you to buy right and within the best locations. You want to look for long term sustainability when buying investment property so you can assure you can rent it long term and that your rents and values will continue to grow.
Misused Leverage Can Be Like gambling.
Having access to lots of money that is not from your wallet of hard earned income can cause some people to abuse it and make less than constructive decisions. The desire to get rich quickly and use other people’s money can create challenges for a person who is not highly disciplined.
When you feel confident you found something in a sustainable market that will allow you to leverage a property and not have any issues making a mortgage payment long term, then leverage can be a wonderful thing.
The ability to borrow money from a bank and put up your cash for as little as 20% of the value of the investment differentiates real estate from all other investments. The bank puts up 80% while giving you the benefits generated from 100% of the investment.
Breaking it down, let’s assume you have $100K to invest. Here are your options:
• Buy with cash: You can buy 1 property for $100,000. Assuming you get a 10% return on that investment each year, you generated a $10,000 total return on your $100,000 investment.
• Leverage using OPM (Other People’s Money): You can borrow as much as 80% to finance the $100,000 property. This means you only are using 20% or $20,000 of your $100,000 that you have to invest. Assuming you have the same 10% return or $10,000. Your $10,000 is a return based on your $20,000 cash investment. With the remaining $80,000 you have left to invest, you can literally duplicate this and buy a total of 5 of these exact same properties. With 5 properties you can generate that same $10,000 return 5 times over for a total of $50,000. That is the power of leverage.
Amazing Real Estate Investing Tool
Understanding the 5 Wealth Building Principles that we talked about in this 5 part Pro Forma review is what seasoned investors look at every day to capitalize on while building their wealth portfolio.
I have created a real estate investing calculator that you can use when evaluating your investment that will quickly compute each of these wealth building benefits so you easily generate you own Pro Forma based on the 5 Wealth Building principles.
I know this was a lot of information packed into this 5 part series. Congratulate yourself for following along. If you grasp these 5 wealth building principle and how to analyze them within a pro-forma you will be more advanced than majority of investors out there.