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The Power of Leveraging Real Estate Investments.
We help investors purchase real estate investments as well as we professionally manage those investments for them. Today I’m talking about leverage within real estate as one of the core benefits of buying real estate as an investment. I’m going to be comparing three different investment options and showing you over time how leverage can impact the return on those investments.
The first one I’m going to be talking about here, with an example of John, who uses $50,000, I’m going to use $50,000 for all three options here. He uses $50,000 to buy silver. Now silver as an investment typically is an investment that’s used to kind of hedge inflation, but we’re going to use that as an example here, as well as Jane, who uses $50,000 to buy stocks on margin. So the value of the stocks is $100,000, and if you understand margin, you can leverage a little bit and be able to get a greater return. And then the third one is Dave, who uses $50,000 as 20% down payment on a rental property valued at $250,000.
We’ll let the time go here, so 10 years later, assuming a 5% annual return, or annual growth. So 5%, of course, it’s going to vary per year, but when you look over time, we’re looking and seeing about 3-5% appreciation with real estate so we’re going to infer that on some of these other asset classes. Now it’s going to be higher or lower, depending on the asset class, but just for the sake of this example to show leverage … So after 10 years, John’s gold, of course, that’s compound interest over 10 years, is worth $81,000. That’s a $31,000 profit. Jane’s stock is worth 163,000. She’s paying back that $50,000 margin and then she also has the 50,000 capital, so that’s a $63,000 profit on her stocks.
And then Dave’s property is worth $407,000. The $200,000 loan is paid down to about $160,000. Now this is an amortized loan over 30 years, and it could have been paid down more, had he put some additional money towards it, but we’re just being conservative here, down to $160,000. That’s $197,000 profit on the real estate. Now keep in mind, we’re using the same $50,000 investment and it’s just being invested differently.
But it doesn’t end there. Dave’s additional benefits here, with leverage real estate, number one is cash flow. The property was rented, providing ongoing income of $320 per month, now that’s after all expenses including maintenance, and management fees, taxes, insurance, all that stuff, average over 10 years, about $320 per month. Cash flow over 10 years is an additional $38,000. So you add that to the total profit, it’s now $235,000 on that $50,000 over 10 years.
There are also tax deductions that Dave is eligible for because of our tax code and the benefits of owning real estate as investments, and there’s many more. Again, I have a video where I talk about additional benefits to owning real estate as an investment, but I hope as you’re deciding between different asset classes and how you want to invest, and you’re deciding if you want to pay cash, or if you want to leverage, that this can give some perspective. If you have any questions, feel free to reach out to our team. More than happy to help out and answer any questions that you have.