Leveraging
- Leveraging is one of the most important tools in investing. Done right, it is the best way to maximize profits. I cannot stress this enough, it has to be done right.
- Leveraging is when a portion of property, real estate or otherwise, is financed in order to use the debt to supplement investment. Meaning, the portion that is financed is used toward other investments. Most of the time, business owners will procure loans by using their business as collateral. The money from those loans are redirected back into the company in the form of inventory, research and development, expansion, or a great many other ways. This allows the value of the company to be stretched and utilized as a means to increase the value of the business. A farmer might mortgage the farm in lean years in order to invest in next year’s harvest.
- That is one aspect of the leveraging model. The other side is very important to investors looking for a way to maximize profits. Say an investor has $50,000. He could buy $50,000 of, oh let’s say gold. Gold, incredibly hit $1,193.00 per ounce today! He could buy 41.91 ounces of gold with $50,000. In order for him to realize a 20% profit, he would need to see the gold rise to $1,431.64 per ounce, or a direct 20% increase in price. It could happen. It might not. If he was to put that same $50,000 into the purchase of an investment home, he would need to see that home’s value increase to $60,000 to see that 20% profit. It is not very like likely, even in this market that he would be able to find a home for $50,000. What he could do is use leverage. He could use the $50,000 for the down payment and buy a home for $250,000 and have an 80% loan to value on his mortgage. That scenario is more likely. Now, in order for him to see a 20% profit, his home would need to be worth $260,000. That would mean that the value of his home would only have to increase by 4%! That is a lot more likely than gold increasing by 20% during the same timeframe.
- And that, is the power of leverage used correctly.
- This sort of investing has risks and is not for everyone. I am, by no means, suggesting this is for you. If you would like more info, just let me know. You can also consult your accountant, attorney, Priest, Pastor, or Rabbi about the risks involved in investing. I am, however, available to answer your real estate related questions.
