Beginning Real Estate Investing? Increase Your Profits With The Magic Of Leverage

When you invest your money in things like RRSP’s or stocks and bonds your leverage is zero because you have used your own money and none of other people’s money. When you buy a home with a mortgage you have used leverage, which is common in most all real estate investments. You own the down payment of coarse but the lending institution owns the rest.

You bought a house for $100,000 with a $5,000 down payment. The OPM you used, or leverage is 95% and your down payment was 5%. Here lies one of the most important principles for someone just beginning real estate investing or even if you’re well into it:

The More Leverage You Use, The Greater Your Profit Potential.

Now the house you bought for $100,000 has increased in value up to $105,000 in just under a year, not bad. It only appreciated 5% but the good news is the return on YOUR investment is 100% because you invested $5,000, it went up $5,000 so you doubled your money earning a full 100% on your investment. Let’s say that over the next 10 years your property goes up to $25,000 in value, this will give you a 500% return on your money. Leverage is computed by dividing the increase in value by the cash down payment (25 divided by 5 is 5).

If you had $100,000 you could buy one property outright with your cash or you could make a lot of money with leverage and buy 20 properties by putting $5,000 down on each one. So, now instead of having a $100,000 property you’ve got $2,000,000 worth of property. Now let’s say the properties all appreciated by 5% during the first year your profits would be $100,000. If you had bought just the one property instead you would have only made $5,000 in profits.

As you can see, the less of your own money you use, the greater your profit potential and if you were able to buy a property with none of your own money, then the return on your investment is infinite. You can’t divide by a zero down payment. To figure out the return on investment from appreciation, taxes, or principle reduction, always divide by your cash down payment.

We have seen here how leverage can increase you chance for profits, but if you are financially unprepared it can greatly increase your potential risk. Higher earning strategies always have a higher risk potential that go along with them. The super save route of investing the entire $100,000 into one property is totally safe but will give you a much lower ROI. Those 20 properties you bought all have a mortgage on them which you are responsible for so if a few aren’t rented or the rents don’t get paid the money comes out of your pocket. Does this additional risk warrant the use of leveraging? Yes it does but you have to plan ahead and be prepared to handle any possible negative cash flow problems should they arise.

“How to handle negative cash flow” will be discussed in an upcoming article.

Real Estate Investing: Income, Leverage, Appreciation And Depreciation

Real Estate investing is not nearly as legally complicated, financially burdensome, or time consuming as you might think.

Every investor can invest for leverage, appreciation, income, equity and appreciation. The challenge facing every transaction is learning to recognize value.

Educated real estate investing is often knowing how to do deals. It does take time to get educated in this arena.

A typical real estate transaction involves understanding financing, negotitation and reognizing the risk and reward parameters of the investment. The truth is, real estate investing is a tough business, and even tougher if you’re not fully aware of the time. However, when approached correctly this is a very exciting and lucrative business.

Several years ago a very good friend of mine purchased a duplex which needed a great deal of repairs. My friend fixed the property up themselves and rented out one part of the duplex and lived in the other part. The tennants rent payment covered the entire mortgage which alloweed my friend to live rent free. Since the time fo the purchase the property has also appreciated considerably. This experience has led my friend to really get educated in real estate investing.

Real estate investing is a business that you can run yourself, with little overhead, and finally achieve the financial freedom you desperately desire. It is not limited to wealthy tycoons. To be successful in real estate investing is to build long-term wealth. Sensible investing is a sure way to wealth, but not necessarily overnight.

For the prepared individual, foreclosures give rise to circumstances for profit. In some cities competition for foreclosures is fierce. Investing in foreclosures is a very popular subject, especially with new investors. Learning the foreclosure market requires a great deal of time and energy but the rewards are certainly well worth it.

Done correctly, real estate investing is a great way to take control of your life, and gain financial freedom. Crunch the numbers and learn as much as you can about this exciting arena. There are opportunities to profit for almost every type of investing style.

About the Author:

David Medley is an active real estate investor and webmaster of http://www.aboutreal-estate.info/

Why Use Private Money For Real Estate Investing?

There are many reasons a real estate investor might want to have a ready access to private money for real estate investing. This article will explore a few of those reasons.

The first reason to use private money for real estate investing is to protect your credit rating. Think about this… if you borrow the money from a private individual, rather than a bank or lending institution, the loan will never be reported to the credit bureau. It won’t count against your debt-to-income ratio, and no record of the payment history will be kept. No one will ever know about that loan, unless you tell them.

Next, and one of the very best reasons to use private money for real estate investing, is the elimination of paperwork. I have never had to complete a loan application for private money for real estate investing. The lenders I work with all know me and the kind of investing I do. Many of them never even care to see the property. When I apply for a mortgage, on the other hand, the application process itself can take several days, and there are mountains of paper.

Yet another reason to use private money for real estate investing is the ready access to fast cash. Sometimes, when a deal is especially good, moving super-fast is a necessity. With bank financing, that kind of speed is often impossible. Even lines of credit don’t always give you the same speed capability that private lenders do. With one phone call to one of my private lenders, I can tie up a deal that other investors only dream about.

A great reason to use private money for real estate investing is the leverage that it gives you. Think about this… if you have $50,000 of your own money, is it better to pay all cash for a $50,000 property, or to put $50,000 cash down on a $500,000 property and use private lenders to finance the rest?

If you answered the $500,000 property, you’re right- and here’s why. Let’s say the $50,000 property rents for $500 per month, or $6,000 per year. Your Return On Investment (ROI would be 12% the first year ($6,000 divided by $50,000). It’s safe to assume the rent on the $500,000 property might be about 10 times that of the $50,000 property, or about $60,000 for the year. If your payback to your lender totals $4,000 per month, or $48,000 per year, what’s your Return On Investment (ROI) for the $500,000 property? If you answered 24%, give yourself a gold star!

Of course, you would need to take into account the cost of borrowing the money, but even after doing that, you can see there really is no comparison. Using private money for real estate investing gives you something called leverage. Leverage is the ability to move something very large with something very small… a lever. The lever, in this case, is your small amount of cash ($50,000). With it, you can “move” or control a $500,000 property, because the private lender’s money increases the power of your “lever”.

Here I’ve given you a few of the many great reasons for using private money for real estate investing. There are more, but you should have a clear picture of why private money can be so useful in your real estate investing toolkit. If you would like more information, I have written another article on my website titled Private Money For Real Estate Investing.

Now, go make more offers!

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!

Real Estate Investing For Leverage

The term leverage in the world of finance is defined as borrowing money to purchase a company and relying on it to produce enough capital to cover the interest payable on the loan. This is the type of leverage that investment in real estate properties provides.

You do not have to be rich to invest. The goal, of course, is to make money for the long term. The principle is rather simple: spend a little to make a lot. Take the $10,000 you have accumulated in equity, use it as a down payment on an investment property that has a positive cash flow, use the cash flow to pay the mortgage and your investment will appreciate into ten times the original amount over time.

It is interesting to note that after you have invested in a property; your net worth has increased substantially from your initial investment. Let?s take that $10,000 and buy a piece of property with a fair market value of $100,000. The $10,000 is 10% of the value and makes a nice down payment. The mortgage is now $90,000 and you have equity of $10,000. Your net worth has increased by $90,000.

Let?s say the property produces a cash flow of $900 per month. The monthly note on a 30-year loan at 7% is only $598. Your positive cash flow is $302. If you paid all the cash flow into the monthly payment, and if you bought the property in 2006, you would have the property paid off in 2019 ? 13 years ? and the interest you save would be over $121,000.

There are two directions you could go. One is to buy and hold. This means that you buy this property and you hold on to it with everything you have. It absolutely should increase in fair market value. You should see increases in cash flow. You could add these increases to your note and then you could be realizing in a short period of time a nice, regular income from this piece of property. That retirement nest egg would be actively working for you over numerous years until retirement and through retirement.

If you think you do not have the time between now and when you want to retire, think again. The other direction may be for you. You could build some equity in the property we talked about above. Then you could trade up using the equity you built in making double payments and investment tax incentives.

You should always trade up in value or equal in value in order to benefit from the tax savings. When you take this route, you will actually be raising your net worth by much more than equity because you will be steadily increasing your net worth by more than just the cash flow from your investment.

If you were to take the fast-track accumulated equity you have built by paying double or triple the principle each month and trade up to a property worth $200,000 rather than $100,000, you could double your cash flow and pay off the mortgage in 16 years. That would give you a hefty cash flow at retirement with a very small initial investment.

About the Author:

Investment Property Specialist - Alex Anderson Connects Real Estate Investors With High-Quality Investment Properties. Get A Free Copy Of, “The Investor’s Rental Guide” at: www.GreatInvestmentProperty.com

Real Estate Investing For Leverage

The term leverage in the world of finance is defined as borrowing money to purchase a company and relying on it to produce enough capital to cover the interest payable on the loan. This is the type of leverage that investment in real estate properties provides.

You do not have to be rich to invest. The goal, of course, is to make money for the long term. The principle is rather simple: spend a little to make a lot. Take the $10,000 you have accumulated in equity, use it as a down payment on an investment property that has a positive cash flow, use the cash flow to pay the mortgage and your investment will appreciate into ten times the original amount over time.

It is interesting to note that after you have invested in a property; your net worth has increased substantially from your initial investment. Let?s take that $10,000 and buy a piece of property with a fair market value of $100,000. The $10,000 is 10% of the value and makes a nice down payment. The mortgage is now $90,000 and you have equity of $10,000. Your net worth has increased by $90,000.

Let?s say the property produces a cash flow of $900 per month. The monthly note on a 30-year loan at 7% is only $598. Your positive cash flow is $302. If you paid all the cash flow into the monthly payment, and if you bought the property in 2006, you would have the property paid off in 2019 ? 13 years ? and the interest you save would be over $121,000.

There are two directions you could go. One is to buy and hold. This means that you buy this property and you hold on to it with everything you have. It absolutely should increase in fair market value. You should see increases in cash flow. You could add these increases to your note and then you could be realizing in a short period of time a nice, regular income from this piece of property. That retirement nest egg would be actively working for you over numerous years until retirement and through retirement.

If you think you do not have the time between now and when you want to retire, think again. The other direction may be for you. You could build some equity in the property we talked about above. Then you could trade up using the equity you built in making double payments and investment tax incentives.

You should always trade up in value or equal in value in order to benefit from the tax savings. When you take this route, you will actually be raising your net worth by much more than equity because you will be steadily increasing your net worth by more than just the cash flow from your investment.

If you were to take the fast-track accumulated equity you have built by paying double or triple the principle each month and trade up to a property worth $200,000 rather than $100,000, you could double your cash flow and pay off the mortgage in 16 years. That would give you a hefty cash flow at retirement with a very small initial investment.

About the Author:

Investment Property Specialist - Alex Anderson Connects Real Estate Investors With High-Quality Investment Properties. Get A Free Copy Of, “The Investor’s Rental Guide” at: www.GreatInvestmentProperty.com

Private Money Real Estate Investing - One Clause You Should Never Forget

When you use private money for real estate investing there are several clauses your lending agreements should never be without. One of those clauses is the ?Substitution of Collateral? clause. Here?s how it works.

Wouldn?t it be great to be able to just swap one property for another on your mortgages? Of course it would, and when you use private money for real estate investing, you can? just by including one little clause in your private lender?s notes.

Here?s how the clause would read.

“Borrower reserves the right to substitute like collateral of equal or greater value” Did you see what just happened? By inserting one tiny little phrase in your private notes, you?ve created a scenario where you don?t have to pay off your loan and get a new one every time you sell and buy property. The flexibility and power this one little clause will give you is outstanding. Suppose you own a duplex that you used private money for real estate investing to obtain, but now you have the opportunity to sell at a large profit. Instead of worrying about the hassle of paying off the note and getting a new loan for your next property, why not just go out and find an equal or greater value property to invest that money in.

Once you finalize the transaction, it?s important that you file your lender?s security against the property with the appropriate government agency, normally your county clerk. Your lender will most likely insist on having a mortgage or deed of trust on file to protect their interest.

The flexibility and leverage this clause gives you is yet another great reason why using private money for your real estate investments is a wise idea.

Your investor will be happy to keep his money working, and you will too. It?s a win-win for both of you, and it?s possible because you thought to include a ?Substitution of Collateral? clause in your private money for real estate investing note. For more information visit http://www.private-money-real-estate-investing.com

Smart? very smart.

Private Money For Real Estate Investing

Real estate investors, especially beginners, often ask, ?How can I find private money for real estate investing?? This article explores the topic, and outlines a simple three-step approach for obtaining private money for real estate investing.

Finding private money for real estate investing is more about who you know than what you know. To be successful, leverage your existing relationships, and build new relationships with people who are in a position to help you reach your goals.

First, develop a clear, simple, two-to-three page business plan outlining your real estate strategy and tactics, how much profit you think you can make, how much you want to borrow, and how you plan to repay it to those who loan you private money for real estate investing.

Second, make a list of who you know and write a personal letter to them. Using your business plan as a guide, explain the type of investing you do, and emphasize that you?re looking for private money for real estate investing. Focus on the benefits for them? explain why they should loan you private money for real estate investing. Make sure you include how their money will be secured by the real estate, and how you plan to repay them.

Third, reach out beyond your circle of friends and acquaintances by holding a series of free seminars. This is the single best way to get private money for real estate investing. Don?t let this idea scare you, even if you don?t like the thought of speaking before a group. Once you develop your presentation, you can give it to as many or as few people at a time as you like- even if it?s just one-on-one!

There are plenty of tricks and tips available for using seminars to find private money for real estate investing. I?ve written a much more in-depth article on it, and you can find it at Private Money For Real Estate Investing. If you follow these steps, you?ll be far ahead of the other investors in your town!

Now, go make more offers!

Real Estate Investing: Private Financing & Acquisition Techniques

A good investor knows that an estate property selected with care can be quite rewarding. It can render above 100% ROI per year, along with a good leverage. That is why real estate investing has become the most preferred form of investment by ambitious investors.

However, real estate investment calls for certain qualities, such as a good credit record, a sound financial position, an appreciable income, bundles of dollars for down payment, and the lenders by your side.

All are not bestowed with such financial qualities. But, there are techniques to enable smart people with less cash to step into the world of real estate. Some of them are discussed below:

Technique # 1: Trust.

It is important for the estate seller to trust the buyer with regards to the equity payment as per the terms. One of the most practiced ways is to give the seller a substantial amount of cash as down payment.

Technique # 2: Less Terms, More Price.

The seller asks for more money in exchange of flexing the terms. A Florida estate seller agreed to extend the payment schedule by 1o years in return of a higher sales price of $3,000.

Technique # 3: Direct Questioning To the Seller.

Often, buyers hesitate to ask the sellers why they need the money. They keep on assuming needs and knitting diplomatic questions to extract the information. The best way is to directly ask the seller. You can always assure him of your help provided you know what he intends to do with the cash.

Technique # 4: Paying By Skill, Not Cash.

Buyers such as lawyers, insurance agents, merchants, painters, and so on are skilled enough to provide important services to the seller. They can trade their skill in the dearth of funds for down payment.

Technique # 5: Life Insurance Policy at the Rescue.

Life insurance policy is an asset that can be used for other investments. Policy holders whose policies are gathering dust can sell them to withdraw funds.

Technique # 6: Trading Items as Down Payment.

It is not a hard and fast rule to pay the down payments in cash. If services can be traded, so can be valuable items, such as musical instruments, furniture, paintings, and even pets! Rare species of animals prove to be a perfect down payment. Some investors have even traded their precious emeralds, rubies, and other gems!

The trick is to satisfy the seller?s needs and win his trust. There are many financial advisors to help you in investments. They would tell you more techniques too. Remember, you need not be a millionaire to own an estate property.

Why Real Estate Investing Can Be Easy

Using leverage to buy real estate is the fastest way to build your portfolio. As Conrad Hilton’s mother once said, “If you want to launch big ships, you have to go where the water is deep.”There are 4 main benefits of building a Real Estate Portfolio.

The first is Cash Flow. In many of today’s transactions creating cash flow can be obtained by strong negotiating. It is currently becoming a buyer’s market and you will need an agent that will be dedicated to helping you obtain the property at the best price. Interest rates are still low and minimal closing costs can be obtained from the many lenders pushing their product lines.

The second benefit of building your real estate portfolio is Inflation. As you make improvements to your buildings, in today’s dollars, you will beat inflation. You will compound your money as you make improvements that last over years. The decrease in long-term expenses will help you make a larger profit in the long-run. Think long-term with real estate.

Tax breaks are the third benefit. Investing in real estate has always been heralded by Americans and you will be rewarded for it. There are numerous tax shelters that can be used. You will be able to take advantage of the many tax breaks with concerns such as capital gains, deductions, and everyone’s favorite - DEPRECIATION.

Lastly, we can’t forget Equity Build-up. Buying real estate is an investment that can have high reward over time. Obtaining financing and paying your mortgage on time every month is like an automatic investment program. You are paying down the principle every month while the market is going up over the long-term. It is a win-win scenario.Many of the overnight get rich quick schemes are a scam when it comes to real estate. You will do well by aligning yourself with a great team - Mortgage Officer, Real Estate Broker, Inspector, Attorney and Accountant - that will look out for your needs. If you buy a building at the best price (have your Real Estate agent create a Comparative Market Analysis for you) and are willing to put some sweat equity into it, you will create wealth for yourself over time.

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