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When it comes to real estate investment you need
use leverage to gain the best return on your investment. Leverage
means you need to use other peoples money to help you. With leverage
you can purchase far higher priced real estate. For example if you
have $100,000 you could put it all into a $100,000 property, or
alternatively you could leverage and borrow $900,000 to purchase a
$1,000,000 property. You can then control a property worth 10 times
more than you initially invested.
Unless you can guarantee high capital gain on an
investment property, you want to positively gear your investment.
Ideally you want to be getting a higher return on the property than
the interest you pay on your loan. In the example if the $1 million
property is returning $100,000 a year, i.e. 10% return (cap rate)
and you are only paying 8% interest on the borrowed $900,000 then
you receive $100,000 a year minus $72,000 (interest payments), that
equates to a net income of $28,000, which is a 28% return on your
equity as opposed to a 10% return.
Capital is also leveraged, as you receive all the
extra equity if the property appreciates, even if you only own 10%
of the property. This is how some investors are able to make such
high returns on real estate investment.
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