All
Members
Companies
Blog
Forums
Podcast
Webinars
    User Log in  /  Sign up
  • Forums
    Newest Posts Trending Discussions Followed Forums Real Estate News & Current Events General Landlording & Rental Properties Buying & Selling Real Estate Deal Analysis See All
  • Education

    Read

    BiggerPockets Blog BPInsights: Expert Analysis Coronavirus Content & Resources Guides Glossary Reviews Member Blogs

    Watch

    Webinars Video Library Financial Independence Blueprint Intro to Real Estate: Rentals

    Listen

    BiggerPockets Real Estate Podcast BiggerPockets Money Podcast BiggerPockets Business Podcast Real Estate Rookie Podcast Daily Podcast (Audio Blog)

    Topics

    Business Operations Finance Finding Deals Property Management Property Types Strategy
  • Network

    Recommended Vendors

    Real Estate Agents Mortgage Lenders Companies Hard Money Lenders Contractors Investment Companies

    Search

    Members Events Jobs
  • Tools

    Calculators

    Rental Property Fix and Flip BRRRR Rehab Estimator
    Wholesaling Mortgage Payment 70% Rule Airbnb

    Services

    BPInsights: Property Insights Tenant Screening Property Management Lease Agreement Packages

    New Feature

    BPInsights (beta)

    Quickly analyze a property address or ZIP Code to compare your rent in your neighborhood.

    Analyze a property
  • Find Deals
    Real Estate Listings Find Foreclosures External Link Ads, Jobs, and Other
  • Bookstore

    Real Estate Books

    Profit Like The Pros Bidding to Buy See all books

    Featured Book

    BiggerPockets Wealth Magazine book cover
    BiggerPockets Wealth Magazine

    Written by financial journalists and data scientists, get 60+ pages of newsworthy content, expert-driven advice, and data-backed research written in a clear way to help you navigate your tough investment decisions in an ever-changing financial climate! Subscribe today and get the Oct/Nov issue delivered to your door!

    Get the Magazine
  • Pricing
Log In Sign up
User
Quick search links
Podcast Hard Money Lenders Books Washington
BlogArrowMortgages & Creative FinancingArrowInvesting Using Financing: Solid Way to Build Wealth or Imminent Disaster?
Mortgages & Creative Financing

Investing Using Financing: Solid Way to Build Wealth or Imminent Disaster?

Leon Y.
Expertise: Mortgages & Creative Financing, Personal Development, Real Estate News & Commentary, Real Estate Investing Basics
46 Articles Written

Investing in real estate may not be as sexy as the stock market.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

It is a long, grueling process that can take many years before one can realize its true returns. While the return on real estate may ultimately be quite rewarding given the length of time, one is tempted to want the returns now and want the returns high.

That is how I approached real estate investing in Las Vegas from 2012 to 2013. I sought higher returns once the real estate prices in Las Vegas rose, and I was no longer getting high yields in my returns. In the past, I was able to get 10-12% cash on cash returns on my real estate investments, but from 2012-2013 my returns began to fall.

Related: Negotiating Seller Financing: The Definitive Guide

Using Leverage to Earn Higher Returns

Then I began investing in real estate using seller financing. As a new real estate investor I was unable to get a regular mortgage, but I was still able to get loans between 5-7%. Using financing, I was able to achieve higher returns as long as what I paid out in mortgage each month was less than the cash flow I got from tenants.

For example, there is a house that costs $150,000, which after rental expenses can rent out for $900. If I were to buy it with cash, I would achieve a 7.2%.

But if I were to buy it with 20% down ($30,000 investment) with a 5% fixed 30-year mortgage, I would have to pay $644 in mortgage, thereby netting $255 a month, $3,069 a year. If I earn $3,069 a year on a $30,000 investment, I am actually getting a 10.23% investment.

I also set myself up a greater return in future appreciation. If the house were to go up $30,000, I would have doubled my investment return, whereas if I had bought it cash my investment would have only gone up by 20% in value.

The Dangerous Side of Financing

While it almost sounds like we should all leverage our returns whenever possible, getting financing still creates risk for an investor.

Whenever there is a vacancy, a cash buyer only has to worry about paying property taxes and insurance, a small expense. However, with financing in place, the investor has to pay out $644 in principal and interest every month until a new renter comes in.

Related: Unique Strategies to Successfully Obtain Bank Financing

If the investor does not have a large cash reserve, he or she is bound to get into real trouble. Keep in mind, a $644 payment every month is about 2.15% of the investor’s initial investment. When you think of it this way, an investor can be taking a lot of risk with financing.

Creating a Healthy Mixture of Both

I generally prefer to have a mix of both free and clear homes and seller financed homes. As my portfolio grows larger, I am leaning towards owning more free and clear homes. Another side effect of leverage is that the more financed homes I own, the greater the chance is that multiple homes can go vacant at once.

The long tail risk of such an event, while small, can still cause a devastating loss to my reserves and portfolio. So the next time you consider using financing to leverage your investment, understand that you have to prepare for that rainy day, which inevitably will always come.

Do you use financing to leverage your real estate investments?

Join in on the comments below!

By Leon Y.
Leon Yang is an active real estate investor in Las Vegas. He is a buy and hold guy who also likes to flip from time to time. His main passion is to traveling to the less traveled places and inspiring others to become financially independent through real estate.
Read more
3 Replies
    Larry Russell
    Replied over 6 years ago
    Nice points with a very interesting point of view. I wish I was in the position to pay cash for properties without using some sort of borrowed money to do so. Hopefully sometime in the near future.

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
    Michael Evans
    Replied over 6 years ago
    You explained the risks and benefits of leverage for buy and hold properties perfectly. So the next question is how to manage the risk associated with leveraging. My company has developed two strategies: 1. Enter into long-term lease-purchase agreements to mitigate the vacancy risk. We enter into 30-year lease-purchase agreements that give the tenant the option (but not the obligation) to purchase the house at a fixed price over the next 30 years. We require a 5% non-refundable deposit that is applied towards the purchase and any major repair required during the time they have to purchase the property. We simultaneously enter into a separate by connected 30-year lease agreement that gives the tenant the option to lease the house for 30-years. They are only obligated to pay the lease for 12 months, after which they can break the lease without penalty, but upon the termination of the lease, the purchase agreement also terminates. The lease agreement is much like a lease for a car; they are paying to use the house. Just like a car, they agree to “normal wear and tear” of the house and are responsible for all minor repairs associated with the house. They have to pay penalty fees for “excessive wear and tear” of the house or they risk their lease being terminated. We provide true “property management” in that our monthly fee covers maintenance of the property (weekly landscape maintenance with also provides weekly external reporting on the property and water usage, and annual maintenance of the houses systems such as the HVAC system, pest control and floor maintenance) and quarterly internal inspections of the property to make sure there isn’t “excessive wear and tear”. We also collect rents are very aggressive in starting the eviction process upon a tenant being delinquent on their lease payment. 2. Don’t put all of your eggs into one basket. This is called “money management”, which generally states that no more than 5% of your investable funds should be in a single position. Therefore we help our clients setup each property independent of the other properties and assets they have. We use land trusts and multiple LLCs to segregate the assets and liabilities of our clients. That way if one property goes under, it doesn’t affect the remaining properties and assets owned by our client. We also use diversification counter-cyclical investment strategies to mitigate the risks inherent with leverage. Leverage is the most powerful tool for increasing wealth (followed next by compound interest). At Help Keep My Money LLC, we pride ourselves in developing investment models that lower risk and produce above-average returns for our clients. God Bless You!

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
    Michael Evans
    Replied over 6 years ago
    You explained the risks and benefits of leverage for buy and hold properties perfectly. So the next question is how to manage the risk associated with leveraging. My company has developed two strategies: 1. Enter into long-term lease-purchase agreements to mitigate the vacancy risk. We enter into 30-year lease-purchase agreements that give the tenant the option (but not the obligation) to purchase the house at a fixed price over the next 30 years. We require a 5% non-refundable deposit that is applied towards the purchase and any major repair required during the time they have to purchase the property. We simultaneously enter into a separate by connected 30-year lease agreement that gives the tenant the option to lease the house for 30-years. They are only obligated to pay the lease for 12 months, after which they can break the lease without penalty, but upon the termination of the lease, the purchase agreement also terminates. The lease agreement is much like a lease for a car; they are paying to use the house. Just like a car, they agree to “normal wear and tear” of the house and are responsible for all minor repairs associated with the house. They have to pay penalty fees for “excessive wear and tear” of the house or they risk their lease being terminated. We provide true “property management” in that our monthly fee covers maintenance of the property (weekly landscape maintenance with also provides weekly external reporting on the property and water usage, and annual maintenance of the houses systems such as the HVAC system, pest control and floor maintenance) and quarterly internal inspections of the property to make sure there isn’t “excessive wear and tear”. We also collect rents are very aggressive in starting the eviction process upon a tenant being delinquent on their lease payment. 2. Don’t put all of your eggs into one basket. This is called “money management”, which generally states that no more than 5% of your investable funds should be in a single position. Therefore we help our clients setup each property independent of the other properties and assets they have. We use land trusts and multiple LLCs to segregate the assets and liabilities of our clients. That way if one property goes under, it doesn’t affect the remaining properties and assets owned by our client. We also use diversification counter-cyclical investment strategies to mitigate the risks inherent with leverage. Leverage is the most powerful tool for increasing wealth (followed next by compound interest). At Help Keep My Money LLC, we pride ourselves in developing investment models that lower risk and produce above-average returns for our clients. God Bless You! Reply Report comment

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
Rotate Log in or sign up to comment

Related Blog Posts

Mortgages & Creative Financing Jan 07, 2021

4 Golden Rules of Real Estate Investing

By Jeff Brown

Real estate investing looks different for everyone. But being conservative with your investments can pay off in the long run

Read more →

Mortgages & Creative Financing Dec 23, 2020

Syndication 101: How to Present a Deal To Investors

By Sterling White

Do you have a great real estate deal but not enough cash on hand? Present this information to potential investors to get their buy-in.

Read more →

Mortgages & Creative Financing Dec 10, 2020

How Much Debt Is Too Much When It Comes To Real Estate?

By Brandon Turner

The more properties you own, the more debt you add to your life. How can you tell how much real estate debt is too much?

Read more →

Mortgages & Creative Financing Dec 01, 2020

A Well-Kept Secret for Buying Property With No Money Down (& Growing Your Portfolio Quickly!)

By Matt DeBoth

Coming up with the down payment to purchase property consistently and grow your real estate investment portfolio is a struggle. Enter lendable equity.

Read more →
Log in Sign up

Log in

Forgot password?

If you signed up for BiggerPockets via Facebook, you can log in with just one click!

Log in with Facebook

Or
btn_google_dark_normal_ios Created with Sketch. Continue with Google

Let's get started

We just need a few details to get you set up and ready to go!

Use your real name

Use at least 8 characters. Using a phrase of random words (like: paper Dog team blue) is secure and easy to remember.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.

Or
btn_google_dark_normal_ios Created with Sketch. Continue with Google

Why create an account?

Receive a free digital download of The Ultimate Beginner's Guide to Real Estate Investing.

Connect with 1,000,000+ real estate investors!

Find local real estate meetups and events in your area.

Start analyzing real estate properties, we do the math for you.

It's free!

Explore

  • Membership
  • Community
  • Education
  • Marketplace
  • Tools
  • FilePlace
  • REI Resources
  • Perks
  • Glossary
  • Reviews
  • iOS App
  • Android App

Company

  • About Us
  • Press
  • Advertising
  • Careers
  • Stats
  • Contact Us

Important

  • Editorial Guidelines
  • Terms of Use
  • Rules
  • Privacy
  • FAQ

Social

  • Facebook
  • Twitter
  • YouTube
  • Instagram
© 2004-2021 BiggerPockets, LLC. All Rights Reserved.