Leverage and Your Investments

I love real estate investing for the same reason I love owning a business; leverage.

In the businesses I own I utilize employees to leverage my available time and reach.  I create services that people want to have and then I hire employee partners to serve those people.  It makes sense and, when in balance, is win-win.

Rental properties can use leverage, too.  Sure, you can pay cash for a property.  When you are older there are a host of reasons to have your investment properties paid off.  But when you are younger and acquiring income property, leverage is your best friend.  

"Give me a lever long enough and a fulcrum on which to place it, and I shall move the world." - Archimedes

Really simple math can show this.  Now, keep in mind I'm not "mathing-out" all 4 Benefits of Real Estate Investing.  

Cash
Purchase $200,000 house with $1,600/mo rents.
$1,600 x 12 = $19,200
Gross Return is 9.6% *    ($19,200 / $200,000)

Leveraged
Purchase $200,000 house with 25% down and rents of $1,600/mo.
$50,000 cash in - mortgage at 6% over 30 years
$899.13 P&I x 12 = $10,791.96
$19,200 in rents - $10,792 in annual debt service = $8,408
$8,408 / $50,000 = 16.8% Gross Return *

Quick question: Which is better, 9.6% or 16.8%?

Yes. This is over-simplified. Yes. There is a lot of detail not covered that we would cover if you were buying right now.  No. These are not actual returns with expenses built in. Yes. Leverage wins.  

Make sure to reach out if you have any questions or concerns with this or should you want to learn in detail how to calculate your true real estate returns.

*As with all examples here at Retirement Worth Having these are mathematical equations used to teach and provide clarity.  They are not a guarantee of returns.

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