The Power of Leverage in Real Estate

Using leverage is a great way to boost your return on capital compared to using only your money. Of course, there are pros/cons to using leverage/other people’s money but in my opinion you will fall behind if you do not use leverage.

There’s 4 benefits to using leverage that simply amplify existing benefits of real estate, and 3 added benefits that you don’t get at all by paying cash for real estate.

Benefits of Real Estate AMPLIFIED

1. Increased Cash Flow: By using leverage, you can acquire more properties, leading to more rental income. Having multiple units reduces risk compared to having just one.

2. Debt Paydown: Leveraging allows for acquiring more properties, leading to higher debt paydown over time. This diversification helps mitigate the risk of one tenant not paying.

3. Tax Benefits: Real estate investments offer significant tax advantages, such as depreciation. Whether you invest with cash or leverage, you receive tax benefits based on the property's purchase price, not just the amount you put down.

4. Appreciation: Real estate appreciates based on the property's total value, not just your initial investment. This means that even with a small initial investment, you can see substantial appreciation on the property's entire value.

Bonus Benefits

1. Liability Protection: Diversifying your investments across multiple properties reduces the risk of losing all your equity in one go. With leverage, if one property encounters a liability claim, you're not risking all your assets—just a portion.

2. Market Risk Mitigation: Spreading your investments across different properties and locations helps safeguard against market-specific risks. Whether it's changes in regulations, economic shifts, or seasonal fluctuations, having a diversified portfolio minimizes your exposure to any single market risk.

3. Time Efficiency: Leveraging allows you to enter the market sooner and gain valuable experience faster. Rather than waiting to accumulate enough cash for a single purchase, leveraging enables you to start investing sooner, build equity more rapidly, and become a more seasoned investor quicker.

Case Study

To compare using leverage vs not using leverage, I created a case-study that outlines just that.

Person A

$100k cash

Buys one property for $100k using cash

Person B

$100k cash

Buys four properties for $100k each using 25% down payment

After 5 years…

After holding for 5 years, Person A has made $62,473 - a 62% ROI on their $100k. Not bad, right? Until you look at Person B, who made $178,405 - a whopping 178% ROI on their $100k.

The Power of Leverage in Real Estate

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