3 Powerful Ways to Use Leverage in Real Estate Investing

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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.

But first, what does leveraging really mean? If I plug “leveraging” into our best friend Google, two definitions come up:

  1. Use borrowed capital for (an investment), expecting the profits made to be greater than the interest payable, and
  2. 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!

owner-financing

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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!

Money

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.

Related: What Investors Should Consider Before Using Leverage to Build Their Real Estate Business

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!

Teams

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!

wholesaling-benefits

Bulk

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.

Related: To Leverage or Not to Leverage? Why the Answer Isn’t as Simple as You Think

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!

About Author

Ali Boone

Ali Boone(G+) left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor in 2011 and managed to buy 5 properties in her first 18 months using only creative financing methods. Her focus is on rental properties, specifically turnkey rental properties, and has also invested out of the country in Nicaragua.

11 Comments

  1. kris patel

    Did leverage on own. Decision depends on your goal and age. In 2010 had bought NNN Drug Store for 4 Million. You could gat 100% loan, if you wanted at that time. Say we did 0%, 10% and 20% Down. Monthly income $ 24,500. Pymt @ 6.029% for co-terminous( loan balance 0 at lease end ) 288 months loan will be $ 26,309, 23,678 and 21047 respectively. Cash flow -2%, 1% and 5% respectively. Went for 5% at age 70, needed cash flow. At younger age may have done 100%, your thoughts? Thanks
    kris

    • Ali Boone

      Hmmm Kris. I’d need more details to say for sure. But it sounds like at 100% it would’ve been in the negative, so not sure I would have ever done that one. I’m not as familiar with commercial to know the ins and outs of numbers as much, so hard for me to say specifics. But I do agree on your statement about the decision depending on your goal and your age. But also not foregoing that if you pay all cash for anything, you will always get returns…but it’s whether those returns are good compared to how much you had to pay. I think knowing the numbers is the most important in this case.

  2. Peter Mckernan

    Hey Ali,

    This is a great post. I would agree with the first option. I really do enjoy letting my money work for me once I put 20 percent down on the property that I am investing in. This seems to let me, “sleep better at night.” Either way, this was a great overview of how to acquire those properties for investments.

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