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The Power of Leverage

Investment real estate can be a way to create wealth and diversify your portfolio. It sounds easy right? Well unlike investing in stocks, you can’t just call your fund manager, and investment a small amount of money. You are going to need capital for the purchase and one of the concepts that sets investing in real estate apart from other types of investment vessels, is leverage.

Leverage is using other people’s money to make money for you. Using financing to secure a property where you have 100% control of the property can help multiply your returns. When you sell the property or generate monthly income on the property you are making money on the full value of the property.


Does Leverage Works?

Let’s take a look at two different examples of investors who have $200,000.00 to invest in real estate.

Investor One: Went to a real estate broker and was able to secure one investment property for a purchase price of $200,000.00 with all closing costs included. After property management fees, taxes, and insurance the property generated a cash flow of $1,000.00 per month. Providing the owner did not have any vacancies or expenses at the end of the year, the property will have generated an income of $12,000.00, or a 6.00% return on investment.

Long Term Dispositions: Over the course of time Investor One collects rents, has positive cash flow, and waits for the asset to double in value. The market stays strong, and at the end of fifteen (15) years the property doubles in value, and the investor liquidates the asset. The sales price is $400,000.00, and after all closing costs and expenses are paid, less the owners opening equity balance, the net profit is $176,000.00, or  5.87% additional return on investment each year on the initial investment of $200,000.00

Investor Two: Our second investor financed five (5) properties, on each property they used $40,000.00 for the down payment. After property management fees, taxes, insurance, and mortgage payment aka debt service, the five (5) properties generated a cash flow of $400.00 a month per property. Providing the owner did not have any vacancies or expense at the end of the year, the properties will have generated an income of $24,000.00 or a 12.00% return on investment. 

Long Term Dispositions: Over the course of time Investor Two collects rents, pays debt service, and has positive cash flow, and waits for the investment properties to double in value while the tenants continue to pay the mortgage liability balances down to zero. The market stays strong, and at the end of fifteen (15) years the five (5) properties double in value, and the investor liquidates the assets. The sales price for each property is $400,000.00, and after all closing costs and expenses are paid, less the owners opening equity balance, the net profit is $1,680,000.00, or 11.91% additional return on investment each year on the initial investment of $200,000.00.

Investor Two also has superior diversification over Investor One. The more properties that you own, the more diversified you become, which increases your potential of returns. If you only own one (1) property, and you have a vacancy, you are loosing money and fast! If you own five (5) properties and have one vacancy, you are loosing money; however, the other four (4) properties can help offset the vacancy costs until you can get the vacant property occupied and producing income.


Building Real Wealth

Investment real estate can be a great way to diversify your portfolio and generate wealth in real estate. Looking at the two examples, both offer a great return on on investment, but the real secret is leverage. If you want to get rich in real estate, starting with the right property management company is key. At Flagstaff Real Estate Professionals, we can show you how to properly structure your real estate investments to maximize the potential for the highest rate of return. From one property to an entire portfolio we are the experts in acquisitions, management, maintenance, and dispositions.


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