Investing in real estate with the use of leverage is a very common practice. Leverage is using borrowed money usually in the form of Mortgages from banks to increase your profits in a property investment. Real estate comes in many forms, residential houses, apartments, shops lots, industrial buildings, warehouses, and land.
There is no reason to fear a downturn, when a property is purchased right and properly maintained, it will always appreciate in value. The returns are normally substantial. Real estate investments are typically required to hold for long-term to achieve capital gains, at the same time to hedge against inflation.
However you can actually invest in real estates and profit from inflation alone, say with a 10% down and 90% leverage from a loan, just a 10% inflationary increase in property values can results in a 100% return on your investment. Let me show you an illustration.
Assuming that you have bought a $100,000 single family home with cash, say after a year the property have appreciated by 10% and your property is now worth $110,000. By selling this property you are going to make a 10% returns on your investment.
Another alternative is that you use that $100,000 as a down payment on a $1,000,000 property and you take up a mortgage on the balance. After a year with 10% appreciating in value, now it is worth $1,100,000. Selling the property is going to bring you $100,000 in profit thus achieving a 100% returns on your investment.
This is the benefits of leveraging and if done well and carefully, it can make you wealthy. By putting just the minimum of 10% down on a good piece of property can magnify your returns provided the property has a strong likelihood of appreciating in value. Of course there are other factors involved, read my previous post “Getting rich with real estate” and you’ll get a better picture.
Do your homework first before investing, learn from those who has benefited from real estate investments before and avoid those properties and developers that are questionable. Investing in real estate can be very profitable but also comes with risks. You must be aware of the risks and willing to accept them in order to invest in the real estate market.
“As people seek to improve their living environment, there will be continuous demand for residential property. Investment in real estate market should have reasonable prospects in the long run” - Li Ka Shing (Chairman of Hutchison Whampoa Limited and Cheung Kong Holdings)
Nice blog