Let’s get the biggest misunderstanding out of the way first. Leverage is not primarily about the size of a down payment on a piece of real estate investment property. People who don’t understand what leverage is really all about, are often doomed to failure without even knowing why their money is gone.
In real life, a real estate investor can have better leverage with a 30% down payment than the guy who put just 20% down. Don’t fret, I know I’m probably movin’ your food dish a bit. Here’s the real definition the astute investor employs when applying leverage.
It ain’t rocket science, OK?
There is positive and negative leverage. It all hinges on the relationship between the investment’s return and the cost of the borrowed money used to acquire it. If your loan’s interest rate is 6% and your return is 9%, you have positive leverage. If, on the other hand your return is 5%, you have negative leverage.
Negative leverage is a loser from Day 1, regardless of the down payment.
More simply put, you can’t survive when the return is less than the cost of your borrow capital. Seems like something Captain Obvious might say, but ignore it at your peril. It never fails, which is why it’s called a principle in the first place.
Now ya know.
Call me at 619 889-7100 and find out what makes sense for you, and what’s possible. Have a good one.
