Get The Most Bang for your buck

 Letting Your Money Work for You

Today, we're going to discuss leverage.  If you think that this a post about the latest episode of TNT's  show Leverage, you are reading the wrong post.  Leverage is a financial tool, that if used correctly, can be extremely advantageous for a real estate investor.  On the other hand it can also be your worst nightmare, wiping out your entire portfolio if used incorrectly.

To start off, what is leverage?

Investopedia.com defines leverage as:  The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

How does this apply to Real Estate Investments?

Leverage is created in real estate transactions when mortgages are used to purchase properties. Typically when you purchase a home, a lender requires you to make a down-payment. The amount can vary, given the circumstances, but typically the amount that a lender asks for is 20% of the purchase price.  For example, If I purchase a home for $500,000, I would need to come up with 100,000 at closing. In some cases a buyer can get away with not making a down payment, or by making a very small one. As you can imagine, this is what you want as an investor because the less money you have to pay out of pocket ,the less risky it is.  Your lender will loan you the remainder.

Now let