If you are in the process of learning about real estate investment, first off, good for you! In your studies, you may have heard people talking about leveraging their cash. In this post, we will discuss what leveraging means, as well as the pros and cons of doing it.
Real estate investment is one of the best ways to expand and diversify your investment portfolio. It seems like everyone wants to get into it, yet many never do because they aren’t sure where to start. By learning about the market, what makes for a good investment, and how to leverage your cash, it will be easy for you to enter the real estate game, acquire your first property, and quickly build a portfolio of strong and profitable properties.
What Does It Mean To Leverage Your Cash?
Leveraging is a common term in the real estate investing world which basically means borrowing money to buy a property. Investors will often use a leveraging strategy to borrow cash to purchase one property, refinance for a lower rate, then use the equity built toward the down payment on their next property. Leveraging is how much you are able to borrow to acquire a property in comparison to its value. To calculate leverage, you’ll need to know the loan to value ratio, which is simply dividing the amount you are financing by the value of the property. It is all about acquiring more property for less money out of pocket. While it can offer big rewards, it can be risky. Before buying investment real estate in Metro Detroit using a leveraging strategy, be sure to properly educate yourself, and turn to the professionals if you have any questions about how it all works.
What You Can Gain
When you use leverage to buy real estate in Metro Detroit, you will be able to acquire an investment property that you would not have been able to purchase outright on your own. You will be able to put little to no money down on a property, quickly expanding your potential for a strong return. Let’s say you buy a house for $300k, putting 20% down or 60k. You could have also invested that 60k in land or a mobile home, owning it outright. As the property appreciates, would you rather gain 5% on a 300k property or a 60k property?
When done correctly, leveraging is an excellent way to generate big returns. Just keep your eye on the market and do get in over your head. Keep your eye on how your property is performing as it may not be reflective of what is happening in your local market. With a strong plan, a well thought out budget, and a plan should the market start to turn, savvy investors can use leveraging to their benefit, building an enviable portfolio faster than you may think!
When looking for an investment property in Metro Detroit, its important to focus on the cash flow, the potential for equity appreciation, and the ability to easily find high-quality, long-term tenants. Once you see what is possible, it can be easy to quickly acquire more properties than you are ready to manage. It is very important to take your time and never stop learning about investment real estate in Metro Detroit.
What Is At Risk
When you use other people’s money to buy investment real estate in Metro Detroit, it can come at a cost. When real estate prices drop, so does your equity and net worth. If prices make a large, sudden drop, a borrower can find themselves owing more than the house is worth, or in other words, being upside down on their mortgage.
When real estate prices drop, rental prices will often drop too. This means even less income for investors who may already be struggling with losses in their property value. Plan ahead to avoid big losses.
How To Do It
In order to leverage your cash to buy investment real estate in Metro Detroit, you’ll need to either work with a bank, hard-money lender, soft-money lender, or a private lender. Make sure you understand the terms and are comfortable with the agreement. Working with the wrong lender could quickly negate any profits you are bringing in. If you are dealing with a high-interest loan, be sure to refinance as quickly as possible. Take some time to shop around for a great interest rate before committing to a Metro Detroit area lender.
If you are thinking about buying investment real estate in Metro Detroit, you need to work with a team you can trust. Pinnell Enterprises, LLC can help guide you through the investment process, while helping you find the most high-quality properties to add to your portfolio! Find out what we can offer you! There is never any cost, hassle, obligation, or pressure!