Beginning Real Estate Investing - Understanding Leverage

This is one of a series of articles on beginning real estate investing. One of the fundamental concepts to understand as you are beginning real estate investing is the concept of leverage. Leverage is the ability to move or control something very large with a very small object or force. Leverage as it applies to real estate investing is the ability to control high value properties with small amounts of your own cash.

To understand why this is important, and why leverage is so valuable, an example will help. Let’s assume you are just beginning real estate investing and you have $20,000 cash to invest. The exact amount is really unimportant, so long as you understand the principle involved. To illustrate the power of leverage, let’s assume you are faced with three possible choices of how to invest your $20,000.

Choice one is to purchase a small single family home with a purchase price of $20,000. The market rent for this home is $250 per month, or $3,000 per year. For purposes of this illustration, let’s pretend there are no such things as taxes, Realtor fees, or any other costs involved with purchasing a piece of property. Wouldn’t that be nice? As a you are beginning real estate investing you’ll soon learn otherwise, but for now let’s indulge in a little fantasy.

Choice two is to purchase a duplex for $40,000 by putting our $20,000 cash down and borrowing the additional $20,000. The market rent for this duplex is $500 per month, or $6,000 per year. The monthly payment on our loan is $200, so positive cash flow is $300 per month, or $3,600 per year. Not too bad, considering we are just beginning real estate investing.

Finally, choice three in beginning real estate investing is to purchase a multi-unit apartment building for $140,000 by putting $20,000 cash down and borrowing the additional $120,000. The market rent for all the units in the building totals $1,500, and our monthly loan payment is $1100, leaving us a positive cash flow of $400 per month, or $4,800 per year.

Let’s see which of these three situations best demonstrates the power of leverage. To do this we need to make a simple calculation, called Return On Investment (ROI) for each choice. This is a very important calculation to learn as you are beginning real estate investing. ROI is calculated by dividing the amount of return we get back in a year’s time by the amount of cash we have invested.

In choice one, $3,000 return divided by $20,000 gives us a Return On Investment of 15%. Not bad, considering we’re just beginning real estate investing, but let’s see if we can do better. Choice two gives us a return of $3,600 per year for the same $20,000 invested, so our ROI is $3,600 divided by $20,000, or 18%. That’s excellent, but we still have one more choice to look at.

Choice three gave us a return of $4,800 on our investment of $20,000, so our ROI is a whopping 24%! Why so big? Because even though we’re just beginning real estate investing, we were able to “move” or control a much more valuable piece of property with a very small “lever”… in this case, our $20,000. What gave us that leverage? The ability to use Other People’s Money (OPM), but that’s a topic for another article.

Until next time, I’ve written another in-depth article called Beginning Real Estate Investing.

Now, go make more offers!

Some Basics in Real Estate Investing

Investing in Real Estate has been a very lucrative business for decades dating back to the great depression and possibly longer if it was documented. A person with knowledge about land and property has a great chance to earn big in real estate ventures. Real Estate investment isn?t easy but you?ll get a lot of perks later from experience and understanding the nature of the business. Like most start-up businesses or even doing it part time, initially it will require a lot of research, will power, and persistence in order to succeed, gain knowledge and allow your investment property to grow into a profit. Investing in real estate is risky because it involves a external factors beyond the investors control such as tenants and as of late natural disasters. With the proper planning these can also be overcome.

When we?re talking about investment real estate, the first thing that comes to mind is a rental property or an apartment building, whereby the owner is receiving income on the property they own. This income is used to offset the debt payment the owner has on that property. In addition, to having someone help pay your mortgage, your investment property may increase in value. Typically, the increased value in real estate has exceeded the rate of inflation. But real estate as an inflation hedge varies from locality to locality. Also, leverage exists with real estate since a high percentage of the investment may be made with a mortgage.

There are two major categories in real estate and these are residential and commercial. Usually, real estate owners invest in rental properties like apartment buildings which are still considered residential if under 5 units. The purchase of commercial properties is mainly for leasing to others or to start up a business. But these days, people also want to invest in commercial properties such as fast foods restaurants, markets, small office buildings, or retail shops. Usually commercial investing is riskier because it requires more initial capital and interest rates are higher than residential properties. Residential income property is high in demand because it?s one of the primary needs of the people especially those who live in or close to the city.

Purchasing real estate requires researching the subject property. Firstly, you must consider the location of the investment property because every locality has different characteristics that attract people. One can usually get answers from a local realtor or city planner in the desired area on the development of the area. As a general rule, property that has close access to businesses, good schools, stores and recreation areas is usually in high demand. Additional research involves inspecting the property title report to make sure it is transferable, physical interior and exterior inspection from a professional and a projected financial report on the property. This is one reason why an investor needs a good real estate agent and mortgage broker who have expert knowledge to find you the right property, to put you in the proper mortgage program and have these related professionals available. It?s their line of expertise and that?s why real estate investors contact them in terms of real estate matters. So, are you ready to invest?

Best Real Estate Investing Program - Monopoly Theory

Everybody has a different theory about how best to win at Monopoly. Some say The Railroads are the answer, others the Utilities. For some it?s crucial to own Boardwalk and Park Place, and for others it?s the green and orange properties. When it comes to deciding on the best real estate investing program, you can learn a lot from Monopoly.

If you?re actively looking for the best real estate investing program, and you?re trying to decide whether to invest in houses or apartments, you could try approaching investing like you would approach a game of Monopoly. If nothing else, it will make for an interesting exercise.

When you own property in Monopoly, your primary goal is to acquire all of a particular color group, and your purpose is clear- to be able to build houses and, ultimately, hotels. The more houses, the higher the rents, and hotels allow rents that are higher still. This remains one of the best Monopoly strategies, and I believe it?s also the best real estate investing program for many people.

I consider a hotel in Monopoly to be roughly the equivalent of an apartment building.

Following the Monopoly logic, you would begin by acquiring houses, both single family and duplexes. Using a combination of creative financing, rehabbing, and wholesaling, and being very careful to buy value, you would build up your cash and equity reserves. This is the first phase of the best real estate investing program.

In the second phase of the best real estate investing program, you would leverage this equity and cash into larger 3-5 unit apartment houses in appreciating neighborhoods. At the same time, you will be acquiring topnotch property management skills, and learning the ins and outs of 1031 exchanges and financing strategies.

Phase three would find you trading some of your mid-size apartment houses for large apartment buildings and multi-unit complexes, letting the economy of scale and the cumulative power of depreciation, appreciation, and cash flow make you a very wealthy Monopoly player. Can you see why this may be the best real estate investing program of all?

Over a 5-10 year period, making allowance for a mistake here and there, there?s no reason you couldn?t wind up controlling several million dollars worth of property, and several hundred rental units. Then your toughest decision may be whether to sell Connecticut Avenue and buy Park Place!

For more on getting started right, see The Best Real Estate Investing Program

Now, go make more offers!

Best Real Estate Investing Program - Monopoly Theory

Everybody has a different theory about how best to win at Monopoly. Some say The Railroads are the answer, others the Utilities. For some it?s crucial to own Boardwalk and Park Place, and for others it?s the green and orange properties. When it comes to deciding on the best real estate investing program, you can learn a lot from Monopoly.

If you?re actively looking for the best real estate investing program, and you?re trying to decide whether to invest in houses or apartments, you could try approaching investing like you would approach a game of Monopoly. If nothing else, it will make for an interesting exercise.

When you own property in Monopoly, your primary goal is to acquire all of a particular color group, and your purpose is clear- to be able to build houses and, ultimately, hotels. The more houses, the higher the rents, and hotels allow rents that are higher still. This remains one of the best Monopoly strategies, and I believe it?s also the best real estate investing program for many people.

I consider a hotel in Monopoly to be roughly the equivalent of an apartment building.

Following the Monopoly logic, you would begin by acquiring houses, both single family and duplexes. Using a combination of creative financing, rehabbing, and wholesaling, and being very careful to buy value, you would build up your cash and equity reserves. This is the first phase of the best real estate investing program.

In the second phase of the best real estate investing program, you would leverage this equity and cash into larger 3-5 unit apartment houses in appreciating neighborhoods. At the same time, you will be acquiring topnotch property management skills, and learning the ins and outs of 1031 exchanges and financing strategies.

Phase three would find you trading some of your mid-size apartment houses for large apartment buildings and multi-unit complexes, letting the economy of scale and the cumulative power of depreciation, appreciation, and cash flow make you a very wealthy Monopoly player. Can you see why this may be the best real estate investing program of all?

Over a 5-10 year period, making allowance for a mistake here and there, there?s no reason you couldn?t wind up controlling several million dollars worth of property, and several hundred rental units. Then your toughest decision may be whether to sell Connecticut Avenue and buy Park Place!

For more on getting started right, see The Best Real Estate Investing Program

Now, go make more offers!

Some Basics in Real Estate Investing

Investing in Real Estate has been a very lucrative business for decades dating back to the great depression and possibly longer if it was documented. A person with knowledge about land and property has a great chance to earn big in real estate ventures. Real Estate investment isn?t easy but you?ll get a lot of perks later from experience and understanding the nature of the business. Like most start-up businesses or even doing it part time, initially it will require a lot of research, will power, and persistence in order to succeed, gain knowledge and allow your investment property to grow into a profit. Investing in real estate is risky because it involves a external factors beyond the investors control such as tenants and as of late natural disasters. With the proper planning these can also be overcome.

When we?re talking about investment real estate, the first thing that comes to mind is a rental property or an apartment building, whereby the owner is receiving income on the property they own. This income is used to offset the debt payment the owner has on that property. In addition, to having someone help pay your mortgage, your investment property may increase in value. Typically, the increased value in real estate has exceeded the rate of inflation. But real estate as an inflation hedge varies from locality to locality. Also, leverage exists with real estate since a high percentage of the investment may be made with a mortgage.

There are two major categories in real estate and these are residential and commercial. Usually, real estate owners invest in rental properties like apartment buildings which are still considered residential if under 5 units. The purchase of commercial properties is mainly for leasing to others or to start up a business. But these days, people also want to invest in commercial properties such as fast foods restaurants, markets, small office buildings, or retail shops. Usually commercial investing is riskier because it requires more initial capital and interest rates are higher than residential properties. Residential income property is high in demand because it?s one of the primary needs of the people especially those who live in or close to the city.

Purchasing real estate requires researching the subject property. Firstly, you must consider the location of the investment property because every locality has different characteristics that attract people. One can usually get answers from a local realtor or city planner in the desired area on the development of the area. As a general rule, property that has close access to businesses, good schools, stores and recreation areas is usually in high demand. Additional research involves inspecting the property title report to make sure it is transferable, physical interior and exterior inspection from a professional and a projected financial report on the property. This is one reason why an investor needs a good real estate agent and mortgage broker who have expert knowledge to find you the right property, to put you in the proper mortgage program and have these related professionals available. It?s their line of expertise and that?s why real estate investors contact them in terms of real estate matters. So, are you ready to invest?