Let’s Talk About Leverage in Real Estate Investing
Real estate lets you tap into the power of leverage. Leverage is the ability to use other people’s money to control a large asset. We will show you how to buy houses with little or NO money down. In fact, you don’t even need good credit. If you don’t have to pay any money out of your pocket to buy houses, what is the limit on the number of houses you can buy? There is no limit!
For example, if you have $100,000 to invest in the stock market, how many dollars worth of stock can you buy? In general terms, you can buy exactly $100,000 worth of stock, unless you want to get into border-line gambling with margin accounts. You can’t go to your local bank and get a loan to buy stock. The same goes for CD’s and other investments. You generally have to put up the entire face value in cash. Comparing this to real estate, we show you ways to buy $100,000 worth of real estate with little or no money. Leverage is the key that makes wealth creation in real estate not only possible, but probable.
The power of leverage is not fully understood by most people. The mass media usually misrepresents how good real estate is when they compare increases in house prices with increases in the values of other investments. For example, the media may state that house prices increased 8% average in a particular year while stocks, CD’s, or money market funds may have increased 5% (not as good), or perhaps 10% (supposedly better) for that same year. The media is completely ignoring the leverage used to purchase these properties in the equation! You have to consider how the investment performed in relation to the upfront capital you put in to get a true apples-to-apples comparison, which is referred to as your return-on-investment (ROI).
Let’s assume you buy $100,000 worth of stock, and that stock goes up $10,000. What is your ROI? It’s 10%. Now let’s assume you bought a $100,000 property with $2,000 realestateout.com, and that property appreciates $10,000. Yes, that property appreciated at 10%, but the ROI is 500%! That’s because you invested only $2,000, and not the entire face value as you would with stocks, CD’s, etc. If you paid $1,000 down for the same property and appreciation, the ROI is 1,000%. If you buy a property with NO money out of pocket, you can’t even calculate it. You have an infinity return! This is the power of leverage, and real estate is the only investment where you can take advantage of it.
So even if the stock market has a great year (which does happen occasionally) and goes up 20% and real estate appreciates 5%, your actual return is still many times greater for the real estate. The same misrepresentation can be said of the yields of stocks compared to real estate, which is the ratio of the annual income generated by the investment divided by the dollar amount of the investment. Again, you have to take leverage into account.