Byline: Dan DeGroot
Leverage is a very powerful tool in real estate investing. By using leverage in real estate, investors can buy bigger properties, scale up a rental property portfolio and diversify with different properties in more markets. Let’s start by looking at what it means to leverage.
use borrowed capital for (an investment), expecting the profits made to be greater than the interest payable.
use (something) to maximum advantage.
So how does leverage work?
In real estate, leverage is used by borrowing money, usually from a financial institution, to minimize the actual money you, the investor, must invest. Let’s look at a couple of examples:
You, the investor, purchase a residential property so that you can rent it out for income. The property costs $350,000. You pay all cash and rent it out for $2000 per month. After seven years you sell it for $500,000. You make $150,000 profit and earned $168,000 in rent for a total of $318,000 income over the seven years on the $350,000 you invested. This gives you a return of ~90%.
You, the investor, purchase a residential property so that you can rent it out for income. The property costs $350,000. You put 30% down ($105,000) and get a loan for $245,000. The loan payment is $1177 per month. You rent it out for $2000 per month. After seven years you sell it for $500,000. You make $150,000 profit and earned $69,000 in rent (rent minus loan payment), for a total of $219,000. Here is where the leverage comes in. You only invested $105,000 (the down payment), which gives you a return of ~208%.
These two comparisons are simplistic and omit common costs such as taxes, insurance, and maintenance, but it gives you a stark contrast in the power of leverage. To illustrate this a bit further, in the first example $350,000 was invested in one property. Using the numbers in example two, with $350,000 you could purchase three properties with only the down payments and financing the balances.
Additionally, you would still have money left over.
The power of leverage is how Ruthian Investment Fund operates to grow wealth collectively. We pool member resources to leverage purchases of residential real estate units that generate rents to cover expenses. In just a short time we have accumulated four properties, each generating income as well as growing in value. Join us so you can reap the rewards of leverage through the diversification of pooled resources.
To learn how Ruthian is pooling resources to grow wealth collectively or to sign up for one of our upcoming webinars, contact us at invest@ruthianllc.com.