Let’s talk about how to properly use leverage to considerably increase your real estate returns. The concept of leverage is one of the many ways that real estate as an investment asset stands out from the stock market. For example, when you buy a share of stock, you pay the price listed in cash. No stock exchange or broker is going to accept a 20% down payment on the stock and finance the rest.
But leveraging property purchases through down payments and borrowing the rest is a critical ingredient to increasing real estate returns. The following scenarios use real numbers to see how it works.
Scenario #1 – Pay full cash for $250,000 property
* $26,400 rents – $3,300 expenses = $23,100 profit
* $23,100 / $250,000 cash down = 9.2% ROI
* Paying full cash for the property yields an annual return on investment of 9.2%
Scenario #2 – Pay 50% down on $250,000 property
* $26,400 rents – $10,488 payments – $3,300 expenses = $12,612 profit
* $12,612 / $125,000 cash down = 10.1% ROI
* We’re beginning to see the value of leverage here. By putting down only 50% of the purchase price and borrowing the rest, ROI increases by nearly a full percentage point.
Scenario #3 – Pay 20% down on $25,000 property
* $26,400 rents – $16,781 payments – $3,300 expenses = $6,319 profit
* $6,319 / $50,000 cash down = 12.6% ROI
* By only putting 20% cash into the deal, your ROI increases nearly three and one half percent over an all cash deal, which ain’t too bad. The next scenario, 10% cash down, used to be common but such deals are getting harder to find in today’s lending environment.
Scenario #4 – Pay 10% down on $250,000 property
* $26,400 rents – $18,879 payments – $3,300 expenses = $4,221 profit
* $4,221 / $25,000 cash down = 16.9% ROI
* Comparing a 16.9% return (ten percent down payment) to a 9.2% return (pay full cash) reveals that we increase our annual return by 84% with the lower down payment. And that’s how leverage increases your real estate returns.
The Bonus Commissions Team
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