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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. Let's assume that income properties have been appreciating at an
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 a 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 you borrow money towards the purchase price.
The principal of leverage can be demonstrated very easily with an investment
model. For those of you who own "ON TARGET", bring up Sample
1. Run the model with the current data and go to the reports
section. Take a good look at the MIRR (Modified Internal Rate
of Return) values on the Future Wealth report or print a copy of
the report. Go back to the input section by clicking on input.
Change Loan 1 Amount on the Property Data screen from $300,000 to $350,000.
This will reduce your down payment from $92,073 to $42,323.
Click on run and go back into the Future Wealth report. Your
Before-Tax and After-Tax MIRR values have increased substantially
for all years. The model clearly demonstrates the principal of leverage.
The On Target real estate investment analysis software can
demonstrate the use of leverage in just seconds. The
sensitivity analysis report allows you to watch both your cash on
cash return and modified internal rate of return values increase as
you reduce your initial investment amount. The On Target
software is only $97.95 and provides
powerful and user friendly analysis to help you increase your income
property investment returns. To purchase On Target, click on
Purchase
Software
The On
Target real estate investment software includes a 30 day money back
guarantee and free support.
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