Leverage in real estate refers to using borrowed capital—typically through a mortgage or loan—to purchase a property. By leveraging funds, investors can control a larger asset with less of their own money, potentially increasing returns.
Leverage is a common strategy in real estate because it allows investors to acquire more properties or larger properties than they could with cash alone. It's used to maximize return on investment (ROI) and build wealth faster by spreading out available capital across multiple investments.
One simple way to understand leverage is through the Loan-to-Value Ratio (LTV), which shows how much of a property’s value is financed with debt. Another way is to compare the return on equity (ROE) with and without financing to measure the effect of leverage on returns.
Example: If a property is worth $400,000 and the investor only puts in $100,000 of their own money, the leverage ratio is 4:1.
Over-leveraging can lead to foreclosure or losses in downturns
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