Realizing the Profits of Leveraging
When you leverage property with more of other people’s money, (whether a bank or private lender) you gain the flexibility of stretching your dollars to buy and sell more properties simultaneously. Instead of owning just one $100,000 home with a $20,000 down payment, you can own four $100,000 homes with four, $5,000 down payments. If you have chosen properties wisely by buying enough below market value to resell at a profit—then you will be enjoying the greater appreciable value of $400,000 worth of real estate vs. the lesser return of the single $100,000 property.
Pros and Cons of Maximum Debt
With all the creative financing options available in the markets, you can spend far less on a mortgage down payment than you would otherwise with the traditional 20% down required on most conventional loans. You can negotiate down payments as low as 5% and below.
In a market boom, most real estate investors leverage property aggressively. When property values are climbing, they will have no problem paying a 5% cash down payment and leveraging the other 95% with a loan. In down markets, investors can be far more conservative. But if you purchase property carefully, what ultimately matters is how fast you flip at your target resale price.
When you pay a down payment of less than 20%, banks charge you a monthly Private Mortgage Insurance (PMI) fee or other fees, which can cost hundreds. But for the serious investor, PMI fees are small compared to the benefits of compounded leverage and profits from multiple properties.
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Leverage Works in Any Market
When you buy a property to sell, what matters most for optimizing your profit is how quickly you can flip it. If you do your homework before buying a house, you will be able to sell it at a profit even in a down market. Even with a small down payment, you can leverage property into a quick resale.
QUICK TIPS
• Using the leverage of other people’s money (OPM) to invest in property is one of the most proven strategies of successful real estate investors.
• Spend less of your own money for a minimal down payment on an investment property while leveraging other people’s money (OPM) to pay for the remaining balance.
• By spending less and leveraging more of other people’s money, you gain the flexibility to invest in more properties. Investing in more properties = greater potential for multiplied profits.
• With creative financing, you can negotiate your down payments as low as 5% and below.
• Even in a down market you can profit by leveraging a large percentage of your property as long as you purchase property below market value, which has high potential for quick resale.
• Banks will charge you for paying a lower down payment with monthly Private Mortgage Insurance (PMI) fees but for the serious investor, PMI fees are small compared to the income benefits of property leverage.
• Leveraging property works in any market if you know how to value property to buy and sell.
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