Why You Need To Use Leverage To Buy An Investment Property

Why You Need To Use Leverage To Buy An Investment Property

Should you borrow money and take on debt to purchase your an investment property? Today I cover the reasons why you should borrow money to invest in real estate.

Some people believe that they should buy their properties outright and have no debt, but I really believe that debt is such a powerful investing tool that we can and should use to our advantage and here are a few reasons why I think it works really well in real estate.

It’s Common Practice
The first reason why I think we should leverage to finance or invest in properties is because it's a relatively easy and common thing to do. Not many people are buying their properties in cash out right, the banks are used to it, we're used to it.

Using leverage in other asset classes is possible but it's a more complicated strategy and it's not as mainstream as it is with real estate.

Control Over The Asset
The second reason why you should borrow money to invest in real estate is because you have a lot control over the asset.

If I buy stock in Apple, I have no control over what their plans are for the next quarter, who they're going to hire as their next CEO or any other insider details. When I buy an investment property, I have control over so many things. I have control over who are going to be my tenants, the repairs I decide to undertake and how I maintain the property.

If I buy a property that's a fixer upper, I'm able to add value to that property by fixing it up and therefore forcing appreciation and building my equity that way. There are many ways that you can really control the asset that you can’t find in other types of investments.

Your Tenant’s Pay Down The Debt
The third reason why I think that it's really smart to borrow money to invest in real estate is because that borrowed money is actually not even getting paid down by you, it’s getting paid down by your tenants.

Every single month your tenants are paying down that debt which is increasing your equity and increasing your net worth. It's one of the best ways to grow your wealth through real estate investing. Use leverage and have that leverage get paid off by your tenants.

An Example
The power of leverage is so strong and I will demonstrate this with an example. On a traditional mortgage, you would be putting down 20% and leveraging 80% of the property. So, you put down 20%, but you are in control of 100% of that asset.

Let’s say you bought a three thousand dollar property outright in cash, you have zero debt on it and that property appreciates 3% in a year, your return on your investment will be 3%.

If you take that same property and instead of paying for it outright, you put down 20% and you leverage 80% of the property. Using the same appreciation rate of 3%, your return goes from 3% to 15%.

Essentially because you're using leverage and you only have invested a fifth of what the property is worth, you're getting benefit on 100% of that asset, your returns go from 3% to 15%.

That is a huge jump and that will get you to your financial freedom goals so much faster than if you had just bought that property outright.

For that reason, I think borrowing money to invest in real estate is the best decision that you can make and it's such a powerful tool that we have to our disposal that we need to take advantage of.