Alpharetta Broker Says Use Your Banker's Money for Huge Returns

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Commercial Real Estate Agent with Capital Realty Advisors, LLC

Leverage is the use of borrowed funds for the purchase of an asset, such as real estate.  If you make cash flow because of this, then it’s called positive leverage.    Using leverage increases your power by using other people’s money, namely your banker’s money.
One advantage of using this leverage is obviously you can purchase more expensive property.  Without financing, most of us wouldn’t be real estate investors.  Let’s face it, most people can’t whip out $200,000 to buy a rental house, but some of us can find $20,000.
It also allows you to keep your cash to purchase even more properties.  This helps reduce your risk since it allows you to diversify your real estate holdings.   If you have one or two units in numerous suburban locations and subdivisions, your risk is spread out.  If a subdivision goes down in value, the rest of your properties pick up the slack.  If a particular area decreases in value because of an unsightly landfill or deterioration of a school district, then you’re protected by the rest of your portfolio.
But, my favorite reason for using leverage is that it increases your return on investment.  Let’s look at an easy example.
Let’s say your long lost uncle passes away and gives you $100,000.  What do you do with it?  Maybe buy some real estate?   Probably better than the stock market, right?
Let’s say a $100,000 house rents for $1,000 per month.  If you pay cash for the house, then your cash flow is roughly $12,000 per year, or a 12% return on investment.  Not bad.
But, if you use financing, then you put $10,000 down and have a $90,000 mortgage.  With a 7% interest rate,  your payment would be around $600 per month.  Your cash flow would be $400 per month or $4,800 per year, admittedly, less than the unleveraged purchase.  But, your initial investment is only $10,000, yielding a whopping 48% return!  That’s four times the rate of return from paying cash.  Now, that’s a huge return and that’s why I get excited about investing in real estate and using my banker’s money to line my pockets.

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