What is this leverage stuff?

Are you looking to become a real estate investor? If so, you have possibly heard the term "leverage" used by someone already in the biz. The concept of leverage is what makes real estate a different kind of investment than stocks, bonds, or mutual funds. Using leverage is like supersizing your available investment funds.

Lets use a simple example to make the leverage concept a little clearer. Say you have $25,000 that you want to invest. If you buy stocks (without consideration of broker fees), you can buy $25,000 worth of the stock. If the stock you like sells for $25 per share, you can buy 1000 shares. If after one year the stock value increases 20%, your stock would be worth $30,000. You made $5000, not too bad - a savings account won't do that for you. The larger gain comes from taking a risk, since the stocks carried no FDIC insurance like the savings account.

Now, about that leverage available to the real estate investment. This concept is based on using what we refer to as OPM (other people's money). If you want to put that same $25,000 into a piece of real estate (not considering closing costs), with the right property, you can get a 75% loan and that means your $25,000 will buy a property valued at $100,000. So, you now have a property valued at $100,000, but you have only put $25,000 into the deal. That is leverage.

Of course you can get into a discussion about making the payments on the $75,000 loan, but that is why tenants were created. There are some other factors that also sweeten the real estate deal, such as depreciation and cash flow. And your $100,000 property only needs a 5% increase in value to recover the 20% return you would have made on the stock.

Both stocks and real estate can go down in value. A decrease in value is far more common in the stock market then in the real estate market and while a particular stock can lose 100% of its value - real estate almost never is worth $0.00.

The Chattanooga area is a great place to invest in real estate. The prices are more moderate than many big cities and it is a great place to live. Here is a great site to learn more: www.ChooseChattanooga.com.

Copyright 2007