Who would have ever thought debt could be a good thing if you’re looking to buy real estate investments? Debt is commonly looked at as the grim reaper coming to take the life of your financial well being.
However, that is not the case. Leverage is not the grim reaper of death, rather an angel of life…potentially. Real estate leverage is one of the most misunderstood aspects of real estate financing. Here, we tell you all there is to know about leverage and your real estate investments. This way, you see an angel, not the grim reaper.
The Basics- Real Estate Leverage
So let’s get the basics down when it comes to this investment property financing method. As a real estate investor, you are looking to build your real estate empire through the purchase of more and more real estate investments. One of the most common ways to build wealth, and worth, in the real estate business, is by financing a rental property with debt. Here are the basics of real estate leverage:
- You’re borrowing money at a constant lower rate. This means leverage comes from using money at a lower rate than the net operating income that is generated by your real estate investments.
- You’re making money on borrowed money through interest. The part where you begin to benefit comes in when the net operating income of your real estate investments exceeds the constant payment you currently owe. How? The interest yield on the money invested in real estate investments will exceed the cash on cash yield of an all-cash investment.
- The benefit of leverage is much better when cash flow is coming from real estate investments. Leverage can be applied to real estate investments not producing rental income so long as it has an increasing house market value at a constant rate. However, if you have yourself an income producing asset, you will benefit even more from leverage.
Players of the Real Estate Leverage Team
Every team has its players. These are the key factors that take part in the real estate leverage game.
Rental Property Financing Structure
Your rental property financing options are diverse, giving you a good amount of variety when it comes to buying an investment property. Whichever investment property financing strategy you decide on will directly affect how much leverage you will receive. Your goals as a real estate investor will set the basis of your wealth building.
Food for Thought: Real estate leverage calculation is not the single deciding factor on which of the investment property financing strategies you will choose. A real estate leverage calculation is only useful when comparing the yield between the different financing alternatives.
Seller Source of Investment Property Financing
This is yet another factor that determines how much debt to buy real estate you will have. The majority of the time, lenders will consider a number of factors when they decide on the amount they will loan an individual. The seller’s agreed terms will have an impact on how much leverage will be available to you as a property investor.
Evaluation of Real Estate Investments
Real estate investments have numbers. Numbers that tell you whether you will have a positive cash flow property or negative cash flow. Your goal is to own a positively geared property that will provide that positive cash flow. In order to benefit from leverage, real estate investments need to be properly evaluated to assure you’re making the right choice. Leverage can go in two very distinct directions: million making, or pocket picking. We all know which way we aim to go- making millions.
Real estate investment tools like Mashvisor’s investment property analytics and property valuation can aid in that evaluation. An investment property calculator is yet another way to get an idea of what the numbers look like. So don’t skip the important stuff when buying real estate with debt. The well-equipped find success easier.
To get a glimpse at the real estate investment tools Mashvisor can offer, like an investment property calculator and property analytics, click here.
Investment Mortgage In Real Estate Investing
It’s simple, no investment mortgage, no real estate leverage. The real estate business gives you the most ability to effectively leverage your invested capital. That is only one of the many advantages of real estate you can benefit from.
In comparison to the many types of investments out there, using real estate as collateral for investment mortgage financing is easy and widely accepted. Real estate has built its name as one of the most secure forms of security for an investment property loan.
More Help: Tips For Getting a Mortgage For an Investment Property
The DON’Ts When Using Leverage for Real Estate Investments
When you decide to utilize leverage, there are a few mistakes you need to be sure to avoid with your real estate investments. Let’s look into the “don’ts” of real estate in order for you to find success while leveraging your real estate investments.
DON’T Count on Appreciation Rates
There are three scenarios you need to consider when you are considering leveraging your real estate investments: the best, the worst, and the realistic. We know fortune tellers don’t exist and projections are all you can really rely on. This is the case with the appreciation value of real estate investments.
Your real estate investments may be appreciated at high rates like 11% to 20%. Be warned, as these are not set in stone real estate appreciation rates. It would be a risky attempt for you to decide to depend on house appreciation rates. You risk overpaying for real estate investments if you put too high of an expectation of a “good” appreciation value.
Biting off More than You Can Chew with Debt Investment Payments
Perfect real estate investments do not correlate with a bare minimum down payment for investment property deals. Crunching the property analytics and taking a glimpse at the potential for a high rate of return due to your low down payment for investment property can be misleading. Return on investment rates can be great confidence boosters. However, they can also be the death of you when you want to leverage your real estate investments.
The issue here is with the higher debt investment payments. With high payments comes higher leverage. With every investment mortgage comes monthly payments. The less of a down payment for investment property, the higher the amount you borrowed, the higher the monthly payment.
This keeps your leverage wound open to the infection of vacancy rates or credit losses, putting you in a poor situation. You may find yourself incapable of making those investment mortgage payments that used to be manageable. That was before the reality of U.S. real estate markets kicked in. Failing to meet your investment mortgage payment deadline puts your real estate investments in jeopardy.
Good Rental Property Financing Options Going Bad
Finding real estate investments with a bare minimum down payment does NOT mean it is a good purchase. We can’t stress enough how much a property valuation is in order. Take into consideration the real estate market trends of the current markets with the use of a real estate market analysis.
Learn More: How To Find An Investment Property Using Analytics
Look at real estate comps to give you an idea of what you should be paying. What is the point of getting real estate investments at a reasonable price if they will fail in making rental income for you? A simple search on Mashvisor could give you an idea of those real estate comparables. That also includes how much rental income you could be making a month.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Leaving Out the Fact that Cash Flow is Queen in the Real Estate Kingdom
Cash flow is on the mind. Neglect anything that won’t bring you closer to making positive cash flow. Possible errors in judgment can be overlooked so long as you have one strong contender- cash flow. Have some cash in your pocket at the end of the month? Then a property that doesn’t gain house market value isn’t much of a worry. However, if your real estate investments are lacking, you may find yourself in deep waters.
Take It Step by Step
We salute you for taking a hit at building your wealth through real estate leverage. Our aim is to make sure you know all you’re getting yourself into. Look at the pretty, the ugly, and everything in between. You are fully capable of building your empire of real estate investments through leverage, so take it step by step. Day after day, you will find what works for you the best. Mashvisor would be honored to take part in building your real estate kingdom. So what do you say?
Get to Know: 7 Steps to Buying a Rental Property