One of the most powerful tools in achieving wealth is the use of leverage. Leverage is using other people’s resources such as money in the form of a mortgage, someone’s labour or knowledge.
In real estate you can obtain greater leverage then other forms of investing. This is achieved through using the bank’s money to pay for a portion of the property purchase in the form of a mortgage. When investing today you are required to have a down payment of 20% of the purchase price. Since the bank will lend you the other 80% this effectively means that you are leveraging $4 for every $1 you have.
Why is this so important? When you consider the return on investment (ROI) for your money, leverage makes all the difference. Any appreciation the property has over the years is keep by you and the bank receives no appreciation for their portion of the funds used for the purchase. This can increase your ROI a multiple of 4 times.
Let’s say you have $200,000 to invest in real estate. If you purchase a $200,000 with all cash and no bank financing you have no leverage. If that house appreciated $50,000 over 5 years your ROI per year would be 5%. Now suppose you purchased the same house with a 20% down payment and 80% from the bank. With the same $50,000 appreciation increase over 5 years you now have a ROI of 25% per year. That is a huge difference.
Now I know you maybe thinking it is still a $50,000 profit either way so is there really any benefit? Well, since you only put down 20% and borrowed 80% from the bank you still have $160,000 left of the original $200,000. With that remaining $160,000 you can now go out and buy 4 more houses worth $200,000 since the bank will lend you the other 80%. Going back to the $50,000 in appreciation over 5 years your profit now goes from $50,000 to $250,000 and it was all achieved with the same $200,000 to start with.
Now you can see how powerful the use of leverage can be and the impact it can have on achieving wealth much quicker.
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It seems like investors are always debating the benefits of real estate verses stocks. Often stock investors comment that they can make 10% return on investment (ROI) per year and real estate earns a much lower percentage. Are they correct?
At Brennan Property Investments we know the true benefits of investing in real estate. On the surface the stock market may get a 10% return and real estate only 3% appreciation but that comparison is based on market values not money invested. The big advantage for real estate is leverage. Since you leverage a high portion of the money used to purchase an investment property, usually 80%, you need to calculate your ROI on your cash outlay into your investment and not only the appreciation on the investment.
Let’s do a comparison for a stock portfolio worth $200,000 and an investment property valued at $200,000. The math for the stocks is simple. A portfolio of $200,000 produces a ROI of $20,000. For the real estate investment we need to determine the value increase on the $200,000 first then use that figure with our actual money invested. The property increased by 3% which is $6,000 for the year. We invested 20% of the purchase price to invest, which is $40,000. If we divide the $6,000 by $40,000 we get 0.15 which is 15%. Already we have a greater ROI then the stocks and this doesn’t include the possible cash flow and mortgage reduction amounts that can further increase your ROI
So what are the actual results? When you consider that your money in real estate is getting 15% compared to 10% in the stock market, your investment is performing 50% better the stock investor’s portfolio.
At Brennan Property Investments we use the Fix, Re-finance and Rent strategy to further increase our ROI above the stock market. When we force appreciation on a property by making repairs, we are able to remove a large portion of our original investment to increase our leverage. Increase the leverage you increase the ROI.
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When it comes to investing in real estate cash or should I say cash flow is king. What is cash flow? It is the amount of money left over from an investment property after paying all the monthly expenses from the rental income. Why is it so important? Cash flow is what allows you to achieve your goals and the lifestyle you desire.
Sure it is nice to have asset appreciation in the form of housing values going up but if the property isn’t cash flowing you are not going to enjoy the investing process. One of the great things about investing in real estate is creating income from using other people’s money. This is achieved by creating a source of cash flow from your investments. This cash flow can give you extra income to enhance your lifestyle, pay off other debts or even retire early.
If your property isn’t cash flowing then you need to take your hard earned money out of your pocket each month to keep the property going. Most people don’t have the extra funds required to feed several negative cash flow properties while waiting for property values to go up to cash in. When someone is faced with this situation they soon truly understand how important cash flow is.
At Brennan Property Investments we use the fix, re-finance and rent strategy to not only achieve both forced and market appreciation but to maximize the cash flow for the property. This way there is no need to worry about trying to carry a negative cash flowing property while waiting for values to increase.
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