Leverage Examples

Leverage is investing with other people’s money. What makes real estate so different from other investments? Banks feel far safer lending you money for something they can take back than for paper investments. This means that you can play big for a relatively low amount of out of pocket money. Let’s take a look at an example.

500,000 dollar home.

Possibility 1:
Pay cash: 500,000
Sell in two years for 525,000
Return on investment (ROI): 5%
Return on equity (ROE): 5%

Possibility 2:
Down payment: 50,000
Finance the rest: 450,000
Sell in two years for 525,000
ROI: 5%
ROE: 50%

The only problem is, it can also go the other way:
Possibility 3:
Down payment: 50,000
Finance the rest: 450,000
Sell in two years for 475,000
ROI: -5%
ROE: -50%

A coworker let me borrow the Cashflow 101 E-Game. It’s really fun and interesting game, and makes a big point about this topic. As long as your generated income is higher than your financing costs, you shouldn’t fear taking on the deal, because monthly it pays you, and when the opportunity comes, you can sell the property at a profit. I’m not yet ready to try investing in a million dollar place, neither is my bank ready to lend me such a sum, but it’s definitely something to think about.