Here’s a question: what word is being defined here ‒ “a machine which amplifies an input force to provide a greater output force”?
The answer: a lever. A very simple and powerful tool, precisely because it multiplies the force that you apply to it. And, of course, when we use a lever… we call the advantage it gives us leverage.
This is a powerful principle when with mechanical objects, but what we’re concerned with here is financial leverage. Specifically, the kind of financial leverage you have when investing in real estate the right way. This is a big topic, and I don’t want to make this a HUGE post. So we’ll just focus on three ways that investing in real estate offers massive leverage.
Leverage Your Capital
This is a big one. When your credit shows you’re reliable and you’re able to come up with a good down payment, banks and others tend to make money available for financing. So with a mortgage, 20% of the purchase price provided by you… buys you 100% of the property.
With a $500,000 property, then, your $100,000 gets you virtually complete control over the property. Of course, this is an income producing financial asset we’re talking about ‒ with potential annual ROI ranges of 33% to 40.5% (see
here for two examples). As your equity in the property rises over time, so does your net worth… while your tenants are paying down your principal and interest for you. Which means, if you think about it, you’re also leveraging someone else’s money, in addition to your initial capital investment.
That’s leverage with a capital “L”!
Leverage Your Time
When you start hitting higher ROI numbers, like 7% or 8%… let alone 15% or 20%… compound interest really starts working in your favor. That’s what the Rule of 72 is all about.
This rule is a quick way to determine how long it will take to double your investment at a given rate of return. All you do is divide your rate of return into the number 72.
So, at three percent, you get: 72 ÷ 3 = 24. In other words, at three percent ROI, it will take you 24 years to double your investment.
With a 5 percent ROI, though, you get: 72 ÷ 5 = 14.4. So a two percent bump in ROI… knocks almost 10 years off the time it takes to double your investment. Which is why things get pretty darned exciting when you move into double-digit returns. A 15% ROI means it takes only 4.8 years to double your investment, while a 20% return gives you… a mere 3.6 years to double it.
Talk about the “time value of money”! Once again, that’s leverage with a capital “L”.
And I didn’t even go into other ways you can leverage your time in real estate investing, like knowing the right kinds of properties to purchase so they’re easy to rent out and maintain… avoiding bad markets and neighborhoods so you don’t have to waste months and years of dealing with unreliable renters and/or prolonged periods of vacancy… or partnering with a top-level property management company, so you don’t have to squander your time fixing broken toilets and handling landscaping yourself.
Leverage Other People’s Needs
Bottom line: people need somewhere to live. Folks buy a home when they can… and they rent one when they can’t. (For that matter, plenty of folks actually prefer renting to ownership to begin with, even though they have the financial ability to buy.)
They’re need… is your opportunity. And both parties win.
Your tenants get a high-quality place to live. You’ve taken the time to invest in an area with good neighborhoods, schools, shopping centers and other amenities, and an overall desirable lifestyle availability. You’ve made sure the property is in good shape, inside and out. You want them to enjoy living there ‒ because who wouldn’t want that for someone else? And… the happier they are, the longer they’ll stay, which keeps your turnover rate low. All of which works very much in their favor.
You get steady income, month after month, year after year. Income that pays for the mortgage, taxes, and maintenance ‒ and puts additional cash in your pocket. You get an increasing share in equity with every passing month as well, and your net worth rises with it. All of which works very much in your favor.
It’s a classic Win-Win. And it all came about by providing a solution to your tenants’ needs. You leveraged the opportunity created by their circumstances. So once more ‒ it’s leverage with a capital “L”!
What Are You Waiting For?
Are there more reasons to invest in real estate than the kinds of leverage I’ve described here? Absolutely. But these are a good place to start. It makes so much sense to take the capital you’ve built up over the years… and leverage it by investing in real estate. You put a relatively small amount of capital and effort in ‒ and get a massive ROI out.
Give us a call at (801) 990-5109 orschedule your free appointment here to build a personalized Wealth Plan. We’ll help you master the art of leveraging your capital, your time, and your ability to serve the needs of others… through investing in real estate.