If you are looking for a way to diversify your investments, you may have thought about purchasing real estate. You may have heard that one of the major advantages of investing in real estate is that it can give you a significant amount of leverage you can use to exponentially increase your returns. At the same time, what exactly does this mean? Learn more about leverage and how you can use it to your advantage.
A Brief Overview Of Leverage
When someone is talking about leverage, they are referring to the use of various financial instruments, such as borrowed capital, to help you increase the potential return on your investment. This is commonly used on Wall Street to make money in the private investment world, and you can take advantage of it in the real estate industry. In this case, you borrow money in the form of a mortgage. Even though you need to repay that mortgage with interest, 100 percent of the capital appreciation of the property is yours when you sell the property despite the fact that you have taken out a mortgage.
The Risk Of Leverage
Even though leverage can help you expand the upside, it will also expand the downside. For example, if your property goes down in value, you may have a difficult time generating enough proceeds from the sale of the property to pay off the mortgage. At the same time, taking out a mortgage is less risky because you will have to put money down and the loan is collateralized. This means that the value of the loan is tied to the house. As long as you take care of the property, you should be able to generate a solid return on the investment, which should more than pay off the mortgage.
Think Carefully About The Property You Buy
While leverage can make it easier for you to make money, you need to think carefully about the property you buy. You need to buy a property in an area that is going up in value while also finding a reliable resident who can deliver a steady stream of income you can use to pay your mortgage as the property goes up in value.
