The Principle of Leverage

Many investors over the years have accumulated their wealth by being smart when choosing to invest in real estate. Although they were savvy enough to spot a good investment when they saw it, they may not have had enough cash on hand to buy it outright. In those cases, smart investing can be done by borrowing Other People’s Money (O.P.M.) to pay for the investment.  Smart O.P.M. use means leveraging your current assets and good credit to purchase real estate.

Here is an example of how this works.  Imagine John borrows $20,000 from his parents to put a down payment on an $180,000 house. To pay the mortgage and other costs, John rents out the home.  After a few years John sells the home for $260,000.  He then pays his parents back the original $20,000 with some interest and then uses the net profit for down payments on two condos. He lives in one and he rents out the other. After five years he sells both condos and buys a home with a basement that he then rents out. By the time he has done this he has purchased a $500,000 home with the equity from his two condos. The money he receives from rent pays for his entire mortgage and all the taxes on his current home, allowing him to live “rent free”.   John leveraged O.P.M. (the $20,000 from his parents and lenders) to make a series of purchases that have put him an enviable position.

In addition to real estate being a wonderful way to climb the home ownership ladder, investing in O.P.M. also has other benefits which can be easily remembered using the acronym I.D.E.A.L.:

“I” = interest deduction

The mortgage interest paid on the first and second residential home loans are tax deductible. Real estate is a good hedge against inflation because property values and the income from renting properties usually rise to keep pace with inflation.

“D” = depreciation

Every year the building or home on your land will depreciate in “book” value allowing you to deduct this depreciation from your investment property.

“E” = equity

Equity is the difference between what you owe and what you own.  The building of this capital asset will continue to grow every time you make a payment.

 “A” = appreciation

 Historically properties have appreciated almost every year and while this is never a guarantee you have an excellent chance of this happening if you buy a high-demand type of home in a high-demand area.

 “L” = leverage

When buyers purchase a home they usually provide a down payment and then borrow the balance.  If you put down 20% and you borrow 80% you get the full benefit of the 100% should the property go up in value, allowing you to maximize your return.

Want to learn more about investing and climbing the appreciation ladder using O.P.M.? Let’s talk! Give us a call at: (225) 932-9552 or fill out the form below and we will be in touch to discuss your investment options:

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