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Real Estate Leverage

Real Estate Leverage is the use of borrowed money to purchase an investment property to avoid paying the full cash amount. For example, one purchases an investment property A valued at $250,000 with a mortgage requiring a deposit of $25,000 or 10% of the property value. In this case, the $25,000 has been leveraged into a $250,000 investment.

If, the investor decides increase his real estate portfolio, he may purchase another property B. This property is valued at $300,000 and requires a 10% mortgage deposit at $30,000. In this case, the $30,000 has been leveraged into a $300,000 investment

However, the investor does not have sufficient deposit money to acquire both properties. He must choose between property A or property B. Property A appreciates in value annually at $10,000 while property B appreciates at $5,000. In this case the smaller leverage money on property A of $25,000 generates a greater potential annual profit of $10,000. Therefore the investor should remain with property A.

If, however, the potential rent from property B is significantly higher than property A, then perhaps the former should be acquired instead. For example, property B generates $15,000 in rental income every year while property A only gives $8,500.

Related Topics

  • Real Estate Pyramiding
  • Gross Potential Income
  • Net Operating Income