Leverage

This could be the blog post title: Dave Ramsey 1.5 about his arch-nemesis, leverage. Leverage is usually associated with nefarious activity such as blackmail, but in real estate, it is when you use someone else’s money to increase your own return. That sounds great in theory but how would this actually look in real estate?

Unlike investing in stocks, investing in real estate requires a larger sum of money upfront to put down. Now, let's say you want to invest in a flip property that is for sale for $500,000 but you don't want to wait ten years to get 20% down payment (see my earlier Dave Ramsey post on why that hurts you more than you know). You find out from your Realtor (*me) that he can get you a hard money lender to loan you 98% of that home sale, all you need to invest is 2% upfront ($10,000).  

For ease of conversation, let's say, renovations take one year to finish and in that year, home values increase in the neighborhood as well. You got an appraisal saying the home is worth $627,000 today. Now, I (your Realtor) get your investment, a $650,000 all-cash offer that will close next week. 

You’re happy because you just made great money on a 2% investment and the lender is happy because their loan portfolio says they loaned $490,000 on a loan worth $637,000. 

You just leveraged the lender's big investment to increase your own little investment for a big return. 

Want to know how this could apply to you? Contact me for a consultation.