The Power of Leverage

Whether you are considering purchasing a home for yourself, a vacation home or rental, if you are a beginning investor, you must understand the power of leverage and time.

Leverage is what people utilize when they don’t have the money to purchase something outright and borrow the balance between the amount they have and the amount of the item. Usually, interest is paid on the amount of the loan. However, the borrower reaps the benefits of the appreciation on the entire item, not just on the amount of the original investment.

For example, assume a new real estate investor wants to purchase a property in our area for $250,000. He has 20% to put down, or $50,000. He borrows $200,000 from the bank at 4.75% interest for a 30 year fixed rate loan.  The loan principle amount is listed for each year below and diminishes as payments are made.

Additionally, the property appreciates in value. In this case we have a modest 5% appreciation which can result in big gains over a short amount of time.

In the example above, our investor has turned $50,000 into $137,843 in just a few short years!

Additionally, there is another perk to be realized by real estate investors – the interest deduction on taxes. The mortgage interest paid on home loans is tax deductible depending on how your investments are set up. In the example above, $9,433 is paid in interest on the first year alone which could result in big tax savings!

If you are interested in learning more about how to leverage your next home purchase or real estate investments, please contact us!