Leverage is a broad term that can mean any number of things. It can often have a negative connotation associated with blackmail or bribery. But in real estate, it involves nothing illegal. It is, however, a powerful term that real estate investors should know.
According to Investopedia, leverage in investing is “an investment strategy of using borrowed money to generate outsized investment returns.” Another way to think of it is using other people’s funds to maximize returns and create profits for yourself.
Leveraging can also be used to in a non-financial sense to refer to methods of making your investment property go your way. It involves maximizing your advantage through whatever resources are available.
You might encounter leveraging in the negotiations for a home, for example. So knowledge about the subject and practice of leveraging is highly worthwhile. If you feel uncomfortable at any point or believe you don’t know enough about it to act on it, you’d be better off seeking another method of gaining traction in real estate investment.
But if you feel comfortable continuing, there are many ways to use leverage that can be hugely beneficial to your investment activities. Here are some suggestions.
Other People’s Time
If you think about it, using other people’s time to your advantage is not an unfamiliar strategy. Every time you hire a lawyer or an insurance broker, you’re buying his or her time for your personal gain.
You’re okay with paying for the service because by doing so, you’ll be able to free up your own time to pursue your passions and profit. Leveraged time is huge asset when you’re trying to make money on your investments.
Let’s say you need to mow the lawn and trim the hedges at an apartment complex you own. You could do it yourself, since it doesn’t require specialized skills or expertise, but it would take hours. Time is incredibly valuable in real estate investments, and many people don’t have enough to spare.
So as an alternative, you could call on the benefits of leverage, and pay someone to do the job for you. Property managers such as the ones at Green Residential will cover the maintenance, tenant screening, rent process, eviction route, and any other property management needs in the Katy and Houston areas for a flat rate fee each month.
The fee will come out of your rent profits, of course, but when you have time to direct to further investments and other money-making ventures, this could be time very well purchased.
You will almost always leverage other people’s money when you make an investment. Unless you’ve managed to build your own real estate empire (in which case you probably don’t need to read this!), you’ll need to locate funds for your venture from a bank or private investor.
You’ll put down about 20 percent of the home’s asking price, and a bank will front the rest. This is the most common form of money leveraging in real estate investing, but not everyone is comfortable doing it.
When you take out a loan, you’re required to continue paying it for 30 years. Ideally, you’ll receive monthly rent payments that cover the loan, but sometimes the risk doesn’t pay off the way you hoped it would.
Another way to leverage money is through property flipping. This involves borrowing money to purchase a home, then using the funds to fix up a property and sell it for more than you paid. Then you pay back the money you borrowed, plus interest, and profit from the difference.
Again, this can be a risky activity, so leveraging money in this manner might not be for everyone. However, it can be an excellent way to maximize your returns, and some investors build wealth this way.
The people you work with can also be leveraged for both your gain and theirs. Some go into real estate investment deals solo because there’s no risk of anyone taking more than his share or swindling you when it’s just your deal.
But there’s definitely power in numbers if that’s the approach you want to take, and when someone uses your money it isn’t nearly as much of a risk as you might fear. If another investor ends up making a mistake or trying to screw you over, isn’t that person just as likely to lose money in the risky market?
Every member of the team will have individual strengths to bring to the table. There will also be more manpower, which allows for greater investment opportunities.
In addition, if any complications arise, you have a team of people to address them. Leveraging the smarts of each your team members can promise greater odds of success with your property investments.
Companies that hope to cut costs and maximize their resources can buy supplies in bulk. This effectively lowers the bottom line while optimizing assets. That’s because it’s cheaper to manufacture, package, and ship units in bulk than to purchase them one at a time.
When you’re looking for a more affordable way to purchase homes, some investors like to turn to wholesaling. This is similar to the tactic of buying a home in order to flip it. You want to find a residence that’s priced below market value, either because the sellers are extremely motivated to sell or because it needs repairs.
After you’ve put a little money into purchasing the property and maybe fixing it up, you can turn around and sell it for market value or higher. This is a great way to earn income on your real estate investment if you have a good eye for deals.
Leverage the Time of Green Residential Today!
At Green Residential, we know how valuable your time is. We can help you maximize your time with our property management services.
If you own a rental property in the Katy or Houston area, we can help with everything from tenant screening and eviction services to landscaping and repairs. For more information about the services we provide, contact us today!