Real Estate Basics
Understanding Leverage One of the appeals of real estate investing as a wealth building tool is leverage, so it's important to understand exactly what leverage is and how to make it work for you.
Leverage is a positional advantage. As a verb, it means to improve or enhance—as in leveraging your position means to improve it.
For individuals in the investing world, leverage generally refers to using borrowed funds to make money and increase one's net worth. Leverage helps both the investor and the lender operate. Looking at a financed real estate purchase is an easy way to understand leverage: You find a property with a market value of $200,000 but it needs a little work, so you negotiate a purchase price of $190,000. You make a 10 percent down payment and finance the remaining $171,000. You now own and control an asset worth $200,000 and it only took $19,000 of your own money—that's leverage. And when that asset appreciates in value, you—not the lender—get the benefit and even more leverage.
That familiar strategy of using other people's money (OPM) to build your own wealth is leverage. But there are other sources of leverage, including other people's time (OPT) and other people's effort (OPE). An example of OPT is using real estate agents, referral sources, and others to find investments for you. OPE is when others do the work and you benefit—for instance, when you hire a handyman to do repairs for you while you invest your time in more profitable activities.
Is it possible to be over-leveraged? Certainly. When you use leverage to invest, be sure the investment can service the debt—in other words, the income from the investment should be higher than the payments and other expenses.
Understanding what leverage is and learning to recognize it and use it in the right place at the right time can drive your wealth-building plan.
For more information about advanced training in real estate investing from Wealth Intelligence Academy, visit www.wiacademy.com.
|