Leverage is what makes real estate so profitable for investors. Consider the contrast with stocks. When you buy stocks you generally pay cash for the full amount. If you buy on margin, you will probably be able to borrow half the amount of the stock. When someone else puts up half the money, one of two things happens. You either can now purchase twice as much stock with the same amount of cash, or you only need to come up with half as much cash for the same amount of stock. Either way, you’re leveraging your purchase. With real estate, lenders are willing to come up with 90, 95, sometimes even 100 percent of the purchase. That’s far more lever­age than any other investment I know. And it pays off when you sell. For example, if you buy a stock with 50 percent margin and the stock doubles in price, you’ve quadrupled your investment. If you buy real estate with a 90 percent loan and the price of the property doubles, you made 10 times your investment. If you don’t believe it, an example should make it clear.

Leveraged Real Estate

Down                                $ 10,000

Mortgage         .       _ 90.000

Purchased rental      $100,000

Sold rental               $200,000            

Less mortgage                 -90,000

Less investment              -10,000

Profit                                 $100,000     

Leverage                 $10,000/100,000 = 10 times

The leverage allows you to make the huge percentage of profit. And remember, the leverage can be even higher with higher LTVs (loan-to-values). Note: We’ve purposely overlooked transaction costs in our example.