3 Powerful Ways to Use Leverage in Real Estate Investing
Leverage/leveraging is a strong word in real estate investing. The most common use of it is in regard to leveraging money (i.e. using “other people’s money”) to maximize returns, but I think leveraging goes beyond just dollars and is a strongly effective tool in a few different areas of REI that are worth pointing out.
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But first, what does leveraging really mean? If I plug “leveraging” into our best friend Google, two definitions come up:
- Use borrowed capital for (an investment), expecting the profits made to be greater than the interest payable, and
- Use (something) to maximize advantage
These are perfect because they lead right into the areas I went to talk about leveraging potential.
There are three areas of REI where I think leveraging can be hugely beneficial. As with anything in REI, nothing is guaranteed so always go in with as much education as possible, and even if leveraging seems like a good idea, if you aren’t comfortable with it, don’t do it! I at least have to throw that out there before someone thinks I’m saying that you must leverage. No way. I think everyone should only do what won’t make them lose sleep at night. However, at least knowing where and how leveraging can be of benefit to you is great knowledge to get started with.
Hang onto your shorts. Here we go!
3 Areas of REI Where Leveraging Can Be Most Beneficial
Here are three ways you can bring leveraging into your investments, hopefully in a way that maximizes your return potential!
The obvious use of leveraging that most everyone knows about is with leveraging your money. Not everyone is comfortable doing it, which is totally fine, but if you are comfortable with leveraging your money, there can be great financial returns in store for you!
Leveraging your money in real estate is one of the biggest cruxes of the entire industry. One example of leveraging your money is buying a rental property with a mortgage (make sure it cash flows after the mortgage payment, though, if you want it to be successful). You put some percentage down, like 20%, and the bank loans the rest of it.
For details on how leveraging can financially behoove you with rental properties — and for details on the debate as to whether to leverage or not — check out “Leveraging vs. Paying Cash for Rental Properties: A Look at the Infamous Debate.”
Another example of leveraging your money in real estate investing would be borrowing money — whether through loans or partners — to flip a property. Meaning, you don’t use your own money but instead you use someone else’s to fund the project, and then both you and that person make a profit in the end (assuming you did it right). I personally am a huge fan of leveraging, mostly because it maximizes my returns. As I mentioned, though, not everyone is. To each their own on this one!
Now we get into less obvious areas you can work leveraging. One is with the people you work with. I think the bigger the team, the better the leveraging — as a general rule of thumb at least.
It’s like the idea of “power in numbers.” If I go at some real estate investment deal all on my own, it’s really not going to affect anyone if they decide to dupe me and take me for whatever they can. But what if I’m part of a much larger group, with much more buying power? Wouldn’t that suggest that maybe someone should think twice before they screw me over? Because if they screw me over and irk off the larger group, aren’t they risking losing a massive amount of money for themselves when an entire buying group pulls out?
It’s purely speculative and nothing official, but I know if I were in a position to lose a large chunk of business versus just one person’s business, I’d surely be minding my p’s and q’s! I kind of like that unofficial “threat” to sellers — behave or I take me and my whole crew with me [insert sassy neck roll here]!
The other way that working with teams comes in handy is if you have any complications come up. I know someone right now with a rental property having an issue, and she has absolutely no idea how to go forward with getting it fixed. Luckily for her, she has a team of people behind her, and they are all leading her through it and assisting with the process. So, it’s like leveraging the power of other people’s brains! Why require my own brain to be able to know every single thing in life if I can utilize other people’s brains — especially when they are much better at whatever it is than I am? Leverage brains — it should become an official concept!
This one comes down to “buying power.” Not in the same way as having a group with a lot of buying power (meaning the can buy a lot amongst them), but rather in the way of lowering costs for supplies or properties or whatever you need to buy. Any time you buy things in bulk, you are at a higher potential for lowering your costs. One house will always cost more than buying 15 of the same houses. The “per unit” cost typically goes down the more you buy.
This is a way of leveraging — use the concept of buying in bulk to lower your costs. I worked with a company a few years ago in Atlanta who was the #1 customer at the time with Home Depot. As you can imagine, they were getting supplies from Home Depot at a much lower cost than you or I could get them for!
There are so many people out there who insist on doing everything on their own. They will only pay all-cash for their properties or investments, they work on their own and not with teams, and they buy one property at a time. There is absolutely nothing wrong with that, but I do think you start robbing yourself out of the potential of using leverage — in all ways. Leveraging things isn’t the only way to succeed, and you can certainly succeed without leveraging, but why pass up free benefits (and fun experiences!) if they exist to help you?
Does anyone have an example of how they creatively leveraged something? Or for those of you who prefer to everything on their own, what’s your reasoning for doing it that way?
Leave your comments below!