Using Leverage for Your Real Estate Investing

Leverage is one of the keys to successful real estate investing. Because real estate is more expensive to purchase than most other types of investments, it's difficult to pay the full purchase price in the same way that you would when you invest in stocks or bonds or mutual funds. In fact, using leverage to purchase real estate is a common occurrence in the real estate investing game. Here are some things to consider when you're deciding whether or not to use leverage for your real estate investing.

Tax Advantages

Leveraging your real estate investments comes with built-in tax breaks. Any interest you pay to borrow money to purchase investment real estate is considered a business expense, and therefore deductible against your corresponding business income.

Using Leverage to Expand Your Portfolio

A judicious use of leverage permits you to better diversify your portfolio for a much lower level of capital commitment. For example, breaking into a particular local real estate market might require a purchase of a $150,000 property. By using leverage you may be able to acquire the property for a $15,000 investment, rather than having to pay the full $150,000 price.

Not All Leverage is Created Equal

Not all borrowing is created equal, and we're not just talking about how interest rates, although that's certainly an important of any investment decision you make. But you also need to evaluate whether you're able to borrow funds using only the property you're buying as collateral, or whether you need to pledge additional assets as security. By the same token, taking out a mortgage from a bank to buy investment real estate is different from taking cash advances from your credit cards in order to make the purchases.

Property Appreciation Multiplies Your Return

Consider your capital return for two different property investment scenarios; one in which you've paid cash and the other for which you've borrowed significantly. Let's assume that the investment property sells for $250,000, and you're able to sell it for $275,000 three years later. If you paid cash for the property then your return on investment from the sale is a total of 10% over those three years.

On the other hand, if you initially purchased that property by putting 10% down and borrowing the rest, then you only invested $25,000 of your own money. When you sell that property you've realized a gain of 100% over your initial $25,000 investment - ten times what it would have been if you paid cash for the property.

Entry into the Market

By using leverage, you may be able to enter into an investment market that would otherwise be unavailable to you. For example, if you're interested in purchasing a residential condominium for investment purposes where the minimum purchase price is approximately $200,000, you can use leverage to enter that market for a much lower commitment of capital as compared to if you paid cash.

While it might not be a great idea to borrow in your personal financial dealings, it can often be a wise decision to borrow when you're investing in real estate.

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