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Leverage and Real Estate Investing: What You Need to Know

Written by Posted On Wednesday, 28 September 2016 04:10

In the real estate industry, it's common to see investors spending their own money and making their purchases in cash. But, there are a lucky few who've discovered the benefits of leverage.


What is leverage?

Based on information from Investopedia, leverage is the use of certain capital or financial instruments to increase an investment's potential return.


The three main reasons that real estate investors like this concept include:

  • Accelerated growth: Using leverage makes it easier for investors to quickly build up a large portfolio

  • Higher returns: The less equity you put in an investment, the higher the return on equity - as long as the amount of the debt doesn't outweigh the advantages

  • Tax benefits: Leverage makes investors privy to a number of deductions like those involving asset depreciation and mortgage interest expense deductions.


How much leverage should you use?

At the end of the day, the amount of leverage you decide to use is a personal decision. But, consider the following factors when you do:

  • Investing experience

  • Level of tolerance

  • Market view

  • The property you are interested in


Recourse or Non-Recourse Leverage? That is the Question

The type of leverage that you choose will change your risk profile. For instance, if you're providing personal recourse, then you must use personal assets to guarantee the loan.

Things are a little bit different with a non-recourse loan. If you stop paying your non-recourse loan, the individual property that was used as collateral is the only thing at risk.


There are pros and cons to both types of loans and you will have to decide which one is best for your needs. For instance, non-recourse loans tend to come with more requirements as well as higher rates because - from a lender's perspective - they are riskier loans.


The Bottom Line

There ever many advantages to using leverage for real estate investment. Doing so can help you expand your portfolio by freeing up your available money, allowing you to invest in other properties. It offers higher returns on equity since you will be using less of your own money. And finally, there are lots of tax advantages to be had.

That being said, there are a variety of factors have to be considered in order to find both the leverage amount and loan product that best fits your investment profile. Do your due diligence and employ the services of experts like the ones at RAM Real Estate Asset Management in Southern Nevada - our 125 years of combined experience virtually guarantees that we understand your business and will be excellent growth partners.

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