The magic word in making money with real estate is ‘leverage’. Leverage means that you buy properties using other people’s money. None or very little of your own money is ever used. In fact a fundamental principle of real estate investing is that the less money of your own you pour into a real estate deal, the higher your chances of making a profit.
Let’s compare this to a familiar example; investing in the stock market. You plan to buy some stocks you think are hot and likely to soon rise in price. They cost $20 per share and you have $2000 allotted to invest. This means you have enough to buy 100 shares and if the stock shoots up to $40 per share you have just made $4000 and doubled your money.
But what if you could by twice the number of share for $2000? You might be able to do that if you buy on margin. In this case, you put down just 50% of the stock price and the brokerage company puts up the other 50% for a fee. You have just leveraged your stock. You control 200 shares instead of 100 and it still only cost you $2000.
Now if the stock goes to $40 per share you have just made $8000 and quadrupled your money. In fact, in order to just double your money, the stock no longer has to double, only rise 50% in value. You get a big bang for your buck, it is known as leveraging your investments and stock investors do it regularly.
Since the stock market is so volatile, you run the risk of losing your money just as easily. Luckily that isn’t the case with real estate investing.
Leveraging real estate works in the same way except much better because the real estate market isn’t as volatile or fast moving as the stock market. A lot of real estate investors are happy with a 5% return on investment per year in real estate.
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More About Geoff Spencer: Geoff Spencer is a staff writer at Investor's Journal and is an occasional contributor to several other websites, including Online Business Gazette. |
