Many people of scared of getting into real estate investing today because of leverage or they choose not to leverage and restrict their potential. Leverage can be dangerous but there is a big difference in taking out $100,000 on a personal credit card or taking out 125% loan and stripping your home equity and using a non-recourse loan to control a million dollar commercial property.
Let’s take a quick at the pros, cons and insanity of leverage…
Not all leverage is bad, especially when it comes to real estate investing. Instead of being limited to buying a ten thousand dollar condo, leverage can mean flipping a million dollar mansion. Which would you rather have a 30% profit spread on? Leverage can give you appreciation on 100% of the value and allow others to pay it off so can amass big wealth a lot faster.
Signs of bad leverage:
Leveraging speculative investments
Over-leveraging to ‘invest’ in real estate with no immediate exit or returns (not rented or having a buyer lined up) and having no reserves to cover you if having your fingers crossed doesn’t work as a marketing plan is insane. Just like taking out 100% No Doc loans at double digit rates on homes which will never positively cash flow and betting on appreciation is insane and is partially to blame for the recent foreclosure mess.
In contrast, using transactional funding for 100% financing under a business name when you already have a qualified and approved buyer lined up and locked in (and a back up) is great use of leverage. Invest in your real estate education. Learn the difference between good and bad leverage and how to use it for smart real estate investing and blaze your way to a better financial future.