BROADCASTS.com

b'Leverage
\\nReal estate investing is kinda cool, I like to think. From building long term wealth to generating residual passive income, there are some really powerful benefits to investing in real estate. One of the things that make real estate so attractive is the ability to leverage debt. When most people hear the word "debt" they automatically think "bad". We\'re told to avoid debt where possible, pay debt off as fast as possible, and be debt-free. Used wisely debt can be a tool that maximizes your wealth and income. Used incorrectly, and it goes the other way.\\xa0
\\n
\\nGood debt and bad debt, as Robert Kiyosaki defines them, are as follows. Bad debt is debt that you have to pay yourself, typically on liabilities. In this context liabilities are anything that takes money out of your pocket every month (think car loans, credit card bills, etc.). Good debt, on the other hand, is debt that someone else pays back for you, typically on assets. Assets, opposite of liabilities, are things that put money in your pocket every month (think investment properties, dividend paying stocks, businesses, etc.).\\xa0
\\n
\\nUsing debt to purchase income-producing real estate can be a great thing that magnifies your return on investment. Any time that you can achieve a higher ROI by using debt than you could without, is good leverage.\\xa0
\\n
\\nLet\'s look at an example of how debt can impact your cash on cash return of a rental property.\\xa0
\\n
\\nScenario 1: Cash Purchase
\\nYou buy a $50K rental property without using debt. This means you buy the property for all cash.\\xa0The property rents for $500/month.
\\n
\\nYour expenses for insurance, taxes, maintenance, and management total $200/month.\\xa0
\\n
\\nYour cash flow is $300/month or $3,600/year. $3,600 divided by your investment of $50,000 = 7.2% cash on cash return.\\xa0
\\n
\\nScenario 2: Using Debt
\\nYou buy the same $50K rental property in Scenario 1, but this time you use debt. With a 20% down payment of $10,000, you borrow $40,000 at 4% for 30 years (a typical fixed-rate mortgage).\\xa0
\\n
\\nThe property rents for $500/month.
\\n
\\nYour expenses for insurance, taxes, maintenance, and management total $200/month.\\xa0
\\n
\\nYour mortgage is $191/month. Total expenses including mortgage = 391
\\n
\\nYour cash flow is $109/month or $1,308/year. $1,308 divided by your down payment of $10,000 = 13.08% cash on cash return.\\xa0
\\n
\\nEven further - let\'s look at appreciation. Let\'s say the $50K property appreciated at 5%, to a value of $52,500. This is a gain in equity of $2,500.\\xa0
\\n
\\nScenario 1: Cash Purchase
\\n
\\n$2,500 in equity gain / $50,000 = 5%
\\n
\\nScenario 2: Using Debt\\xa0
\\n
\\n$2,500 in equity gain / $10,000 = 25%
\\n
\\nNotice here that the amount of equity you have in your property does not matter. The property appreciated, regardless of your equity position. Both scenarios have the same appreciation rate of 5%. However, in scenario 2 using leverage, your return is 5x that without using leverage.\\xa0
\\n
\\nAs my good friend Keith Weinhold from Get Rich Education says, the rate of return on equity is and always will be 0%.\\xa0
\\n
\\nAlright, so that\'s the case for using debt to invest in cash-flowing real estate.\\xa0
\\n
\\nVelocity of Money
\\nLet\'s talk more about how to keep your money and, more importantly, other people\'s money working for you. Knowing now that the rate of return on equity is and always will be 0%, we want to manage and minimize to a certain level the amount of equity we keep in an investment property. This can be done through several ways, once of which is doing a cash out refinance.\\xa0
\\n
\\nA cash out refinance is simply taking out a new loan on your investment property, paying off the original loan, and pocketing the difference. Let\'s look at an example of this.\\xa0
\\n
'