Real estate investors know the importance of using every tool at their disposal in order to get a better return on their investment. One such tool that many investors use to improve their real estate investing portfolio is leverage. Leverage is the use of borrowed money, or debt to buy an investment property. Unlike most investments, real estate doesn’t require you to put up the full amount of the investment on your own. Leveraging an investment or getting the needed funds from a lender allows you to minimize your initial expense while still landing the investment that you’ve decided will give you the best return. There are several reasons to consider leverage if you’re planning your next investment move.
Less Initial Money Needed
The biggest benefit to using debt to fund your real estate investment is that you don’t have to come up with the full asking price for the subject property. For instance, if you are interested in investing in a property that costs $150,000, leveraging the property allows you to borrow a portion of the purchase amount or all of it, depending on the lender that you choose and their lending qualifications. If the property you’re investing in needs some work done to get it up to par, leveraging funds allows you to use your available cash for repairs instead of sinking everything into the purchase.
Number of Investments
It’s also worth noting that leveraging your real estate investing allows you to invest in more than one property at once. Let’s assume that you borrow that $150,000 that we just talked about. Perhaps you’re looking at multiple investment properties, none of which cost $150,000. If you work with a lender who is willing to loan you that amount, there isn’t any limitations about how many properties you use that money to purchase. You may only have enough cash on hand to purchase one property at a time. Leveraging funds for your investment business enables you to be able to purchase more than one property, generating multiple streams of income at once.
Greater Return on Investment (ROI)
The point of any investment, real estate or other, is to maximize your return on investment. Leveraging funds to purchase an investment property allows you to do just that. While it’s easy to assume that an all-cash purchase allows you to make a greater return on investment, it’s important to remember that so much of the money that you make each month from your investment property will simply go to recouping your initial investment. If you get approved for a 20-year mortgage, your monthly payment should be considerably less than the monthly revenue that your property generates. It’s vital that you remember that real estate investing isn’t just about the cold numbers. Instead, success and failure as a real estate investor is about how much money you make off the money that you invested. Leveraging allows you to invest less initial money and your monthly mortgage payment is simply part of your fixed expenses.
Let’s say for the sake of argument that you picked a bad property. There’s always a chance that a property that seems like a sure thing turns out to be an absolute money pit. If you make an all-cash purchase on a property that turns out to be a bad investment, your funds are essentially stuck in an investment that isn’t providing any sort of a return. If you leverage funds and turn that borrowed money into multiple investment properties, you aren’t saddled with one bad investment that holds all of your money ransom. Succeeding as a real estate investor is all about hedging your bets and making sure that you have at least one successful property to offset an unsuccessful one.
Leveraging real estate funds enables people who may not have access to hundreds of thousands of dollars in cash to enter the world of real estate investing. However, even if you do have access to that sort of money, leveraging funds for your real estate investment can serve as a great way to protect your investment and set you up to expand your real estate portfolio much more quickly.