Investing in real estate is arguably one of the best investment choices in the world. It can help you attain financial freedom if you play your cards well.
However, there is a common misconception that you must put a hundred percent of the property’s value or have a lot of money to begin investing in real estate, which is not always the case.
This is where leverage real estate and LTV ratios come into play. Leverage lets you open a property worth a million dollars by only putting a hundred and fifty thousand dollars. If you use leverage, then you can build your real estate empire within a short period.
But first, those who are just beginning to invest might wonder what leverage investing in real estate is?
So, here is the basic definition of leverage, along with some examples:
1. Leverage investing in real estate
So, the fact that the property will generate cash flow can help you pay for the property without you having to dig into your own pockets through leveraging finance options.
As an investor, you would find a property with a good cash flow opportunity, and the higher the return on investment, the less money you would have to put in.
For instance, you are hoping to buy a property worth $1 million; herein, you would put $250,000 as equity or cash, and the remaining $750,000 will be financed. This would give you 75% leverage acquisition.
The goal is to generate enough cash flow to pay the $750,000 debt and earn some extra net income after paying the mortgage.
Moreover, the more leverage acquisition you have on the property, the more return you will be able to get as compared to your equity. You can invest less equity but generate higher returns even after paying the interest and the debt.
Now that you have understood what leverage in real estate is, here are some benefits of using it.
1. Higher return on investment
The primary reason why many people choose this method to acquire property is that it enables them to gain a higher return on their initial investment.
When you use the mortgage to acquire a rental unit, you can enjoy a stable income through the rent that improves your total return. In fact, rental income is the most basic yet best way of earning passive income. Check out this amazing platform “Sleepy Money” to get educated about diverse ways you can make your money work for you to further multiply it multifold.
Moreover, you are not required to pay the monthly installments from your pocket for the property as you generate cash flow from the rental unit to do the same.
2. Chance to buy properties over your initial budget
If you have a traditional mindset and only have 250,000 to invest, but do not wish to take a loan, then you may have to stay stuck with properties within that range.
You will not be able to look at better units or multiple units. Not only does it restrict your choice, but you also have to put all your money in one place.
On the other hand, if you use this $250,000 as leverage to buy a $1 million unit, you will have more options and be able to generate a better cash flow.
Moreover, it will increase your net worth as well.
3. Reduced Risk
It reduces your risk as you are not investing all your money in the property. Once you diversify your portfolio with multiple leveraged properties, then even if one of them performs poorly, you will have other leveraged properties to stabilize your portfolio and generate income.
So, if you are a new or seasoned investor, you must consider using leverage to buy various properties and generate a healthy cash flow.