27 Aug The Law of Leverage in Real Estate Investing
That example of 5% appreciation on real estate shows the power of the Law of Leverage as well. Here’s how it works. As a first-time homebuyer in the U.S., you can actually acquire a $100,000 property for $3,000. In some cases, it’s even possible to receive a down payment from agencies outside of the FHA. It’s like that lever. With a small amount, you can control a much bigger asset.
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Now, you have to learn how to handle leverage because leverage can be positive or negative. If somebody gets too much leverage, then it can come back to bite them. Again, just as with the Law of Compounding, we need to be functioning in the Law of Wisdom so that we don’t end up in unhealthy financial situations.
The Law of Leverage is important because it gives us the ability to take control of an asset. We call it good debt. Good debt allows you to develop that Second X.
Consumer debt is the bad kind of debt. That’s when we go buy things that depreciate in value and aren’t worth anything in a couple of years. But if you buy a piece of real estate, which will appreciate and produce income, then that’s what we call good debt. It allows you to amplify the green line. It allows you to move toward that place of wealth and financial increase—always remembering that it is God who gives us the power to get wealth.
If we properly take the Law of Wisdom and combine it with the Law of Leverage, then we’re able to amplify and increase what we have. We’re able to build wealth.
Anybody who has built wealth has had to take some risks. Now the problem is, a lot of people have lost it all because they took too big of a risk. Risks are relative.They’re relative to what you know and who you know. Say you’re buying a piece of real estate and you’re going to use a property management company to help run that real estate. You don’t know the company very well and you don’t know what kind of competency level they have to run your real estate. Well I can assure you that it can all turn backwards on you in a hurry.
If you have someone who really knows what they’re doing in managing real estate, then they can actually help you amplify your returns. Functioning in the Law of Leverage at a level of causing increase to come into your life is about who you know and what you know.
If I had a $10,000 investment and put it in the stock market, then I would own at that time stock worth $10,000. If I got a 10% return that year on that $10,000 stock, then my return would be $1,000.
But if I took that same $10,000 and put it into a piece of real estate, then I could purchase a $100,000 property. And if I get a 10% return that year, then I actually make $10,000.
With the Law of Leverage working for me in that piece of real estate, a 10% return is actually a 100% cash-on-cash return! If—big if—I got a 10% return on my real estate. So how would you do that? Well, first of all, you may get a little bit of appreciation. Historical appreciation on real estate has averaged between 5% and 6% a year.
If you have a 5%-6% return just in appreciation on that piece of real estate, and you have positive cash flow from rent, and are able to take some tax advantages, then you can very easily get that traditional 10% return!
That shows you the power of the Law of Leverage. We have the ability to take control of a much larger asset through this law. We can manage that asset and receive a much higher cash-on-cash return because of it.
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