What You Need To Know About The Wonder of Leverage!
Leverage is the key that unlocks the powerful wealth-building
potential of real estate. This is because real estate investing only
requires you to put down a percentage of the asset's value - but you
still participate in the growth of the entire asset - magnifying the
potential return on your investment.
When the $16,000 is invested in the 4% fixed income product, it
returns $640 in one year. However, when that same $16,000 is invested
as a 20% down payment on an $80,000 property, it earns $2,400 growth
in the first year despite the fact that we are only assuming the
property grows at 3%. That's actual growth on invested capital of 15%!
Even though we assumed a lower growth rate on the property compared to
the fixed income product, the investor's down payment is rewarded with
the return on the entire property asset value, not just the return on
the $16,000 invested. You might say "Yes, but didn't that investor
have to make mortgage payments?" A legitimate question. Fortunately,
in the case of real estate investing, the tenant often pays most or
all of the mortgage payment. Leverage is the key to the long-term
wealth-building power of real estate. Leverage lets you participate in
100% of the gain on the overall growth of the property while only
putting up a small percentage of the value.