Real estate leverage is a strategy that is often utilized as the means of generating profit from the buying and selling of property. The approach generally calls for making use of funds that are borrowed at competitive rates of interest to purchase properties that are likely to appreciate in value above and beyond that rate of interest. The idea is to offset the costs associated with the acquisition by the appreciation in value of the property, ultimately allowing the owner to either retain the asset and use it as a means of generating income or sell it at a profit that far exceeds the initial investment.
With real estate leverage, the process will often involve identifying a property for sale that has an excellent chance of appreciating in value for a number of years. From there, the investor will project the annual rate of that appreciation to determine if that figure is more than the current average interest rate being charged on mortgages. If this is the case, this means that the investor can obtain financing with a rate of interest that is at or below that average rate, pay off the balance over the years, and realize some net appreciation in the property during each of those years. Once the mortgage is settled in full, the owner can hold onto the property for more years, enjoying additional appreciation, or sell the property at the current market value and realize a return on the investment.
This basic approach of real estate leverage can be used even if there is no need to borrow money in order to manage the acquisition. For example, if the investor is able to purchase a $200,000 US dollars (USD) property using cash resources in hand, and that property has an annual appreciation in the range of seven percent, this means that during that first full year of ownership, the property will appreciate to a value of $214,000 USD. Assuming that the property requires little more than maintenance and the rate of appreciation remains more or less constant, the owner may use this for rental property for a few years, allow it to continue to appreciate in value for each of those years, then sell it at a significant profit.
There is some risk associated with real estate leverage. Buying and financing properties in declining neighborhoods is usually not a good idea, unless the investor has solid reasons to believe that a reversal of fortunes is about to occur in those neighborhoods and property values will begin to climb once more in a short period of time. In like manner, it is important to project the potential even for property that is currently considered desirable and likely to appreciate over the years. The idea is to look beyond the realities of today and determine if those properties are likely to be of more value five or ten years down the road, and if that appreciation in value will be sufficient to offset the costs of acquisition and maintenance in the interim. If not, then the investor would do well to turn his or her attention to properties in other areas, employing the strategy of real estate leverage to another opportunity.
