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The Definition of (lev-er-age) as it pertains to Real Estate Investing

By
Real Estate Agent with Equity Magic Realty

lev-er-age[lev-er-ij, lee-ver-]

-noun

1. the action of a lever.

2. the mechanical advantage of power gained
by using a lever.

3. the use of a small initial investment, credit, or borrowed funds to gain a very high return in
relation to one's investment, to control a much larger investment, or to reduce one's own liability for any loss.

-verb(used with object)

4. to exert power of influence on.

5. to invest or arrange (invested funds) using leverage.

[Origin: 1715-25; LEVER + -AGE]

Real Estate Leverage
Real Estate leverage is the use of borrowed money to increase your profits in an investment.Building wealth via real estate requires the use of leverage. Let's assume you have $100,000 to invest, and you purchase a small income property for $100,000. Income properties have been appreciating at and average of 7% per year. At the end of the first year of operation, your property is worth $107,000. At the end of year two, it is worth $114,490. Now let's assume that you put your $100,000 down on a $500,000 income property. At the end of the first year, it is worth $535,000. At the end of the second year, it is worth $572,450. By using leverage or borrowed money to purchase a larger income property, you have increased your profit by $57,960 in just two years. To get the full advantage of leverage, put the minimum down on good property which has a strong likelihood of appreciating in value. Stay away from questionable properties in run down areas. When you purchase a piece of real estate, you make use of leverage when borrow money towards the purchase price. 

Bill Exeter
Exeter 1031 Exchange Services, LLC - San Diego, CA
1031 Tax-Deferred Exchange Expert
Leverage is a great thing, as long as it is not excessive.  The loan-to-value ratios used by many financial institutions are designed to manage their risk, but they can also keep you out of trouble. 
Dec 16, 2007 05:59 PM