Can someone explain to me in depth what leveraging is, and how it works?
using the financial health and equity of one property to finance the purchase of another property.
in simple terms, if you have $300k excess equity in a project, you can cash it out and use it as the downpayment for another property.
the new property must be able to pay its own mortgage and the cost of the equity cash out.
Very simple. You take either your cash or collateral and use it to borrow money that would have taken you a lifetime to acquire. Leveraging your cash is a fancy term for borrowing against your saved up capital. You have A, I will lend you B, so you can buy C.
the $300k excess equity must be up to the maximum LTV of the financing bank.
with the $300k as down payment and an LTV of 75%, you can utilize the $300k to purchase a property of fair market value of $1,200,000 which is simply $300,000/0.25
keep in mind that the $300k of equity which is cashed out is a loan. the new property of $1,200,000 must pay its own mortgage and the equity cash out loan. If the new property cannot do that, the leverage is not feasible. but some investors will still pursue such a leverage in hopes that the appreciation of the new purchase is great so that upon resale, all costs are covered including the cost of the equity, with something remaining for the investor.
Leveraging gives you the ability to buy a property where the property value (purchase price) is 5 times the down payment (cash you have). The other 80% is a loan/mortgage that you pay back over time (usually 30 years). These payments are made monthly, and include interest charges (the cost to you for the lender selling you that extra 80%).
@Matthew Crivelli So, I basically leverage my first property with another property that produces more cash flow? I seen someone use a formula like this $300,000/0.25=$1,200,000. So, if I cashed out refinanced $75,000 from a property should I use this formula $75,000/0.25=$300,000? Or am I doing it wrong?
Because lenders require a cushion of money that you must have in order to close.
on 300k with 20% down you would need to come up with the 60k plus close about 10k in closing costs plus the cushion.
In all reality you could leverage a little more then 250k with that 75k.
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