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%!
Why?
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.
