The old saying, "Cash is King" has never been more crucial than in the present financial conditions we are encountering. "OPM" (Other People's Money) is a different well-known phrase that every real estate investor should think about utilizing to create every dollar count when entering a deal. The moral from both expressions should be to utilize the power of leverage. The article to follow illustrates how leverage can stretch the dollar to generate greater wealth when buying Real Estate.

The old saying, "Cash is King" has never been more crucial than in the present financial conditions we are encountering. "OPM" (Other People's Money) is a different well-known phrase that every real estate investor should think about utilizing to create every dollar count when entering a deal. The moral from both expressions should be to utilize the power of leverage. The article to follow illustrates how leverage can stretch the dollar to generate greater wealth when buying Real Estate.

The bigger the pool of money the better the investment one can make. Lenders, equity investors (private and institutional) or individuals may be the vehicle to supply this pool of funds. One word of warning is the price of capital relative to the capitalization rate for the project. In the example below, I am going to cite "The Power of Leverage" utilizing the same cost of capital, just to keep things undemanding:

An All Cash Buyer - Let's assume an investor has $1 million to invest and invest a house that yields a ten% earnings as well as investor pays cash for the investment. The Net Running takings would equal $100,000 per year.

Dipping in to OPM - Now instead of paying out $1 million in cash the investor gain leverage as much as 75% of the investment amount. In this case, that will be a loan of $750,000 and the investor would supply $250,000 in cash. The cost of capital on the $750,000 for this case is 6%, and when amortized larger than a 20 year amortization stage, the once a year debt service on the loan could be $64,478 per year. The usual cash flow to the investor would be $35,522 per year, realizing a 14.2% return on your investment. It's much 4% increase using leverage. Now

Comes the Fun Part - If you wish to get even more creative you'll be able to add up back in the principal amount you compensate on the loan ($20,000-$25,000 each of the first 5 years of the loan) and now the adjusted annualized return equals more or less 22%! This really is a lot more than twice over the particular gain from paying cash for a property.

The preliminary criterion was to make investments the $1 million dollars into real estate. Next, I showed you the good thing about OPM. Now, think about the acquisition of various properties. If bought an average of 4 assets and consume leverage, a total investment of $4 million dollars is going to be realized versus $1 million paying out all cash.

This leads me to my final thought on leverage and also the boost of assets. Granted, nowadays this is non-existing, although over the future there is certainly an appreciation factor realized. Let's assume a 3% growth factor for the above investments: that's a $120,000 in value per year on a $4 million dollar investment compared to $30,000 per year in value with the all cash example. OPM and Cash is King. Two essential expressions regarding real estate investment. In remembering the meanings behind both statements and making use the power of leverage, you possibly can aim your good real estate deal into an excellent one.