Know The Use Of Real Estate Leverage

The common question that new real estate investors ask is how does leverage work when purchasing real estate? Leverage is a method of buying real estate with very little capital. With leveraging, you can purchase real estate that is worth so much more than you have in equity or total assets. In most cases, you can receive loans of up to eighty percent of the property's total value, sometimes higher. The reason you can buy real estate with low down payments is because historically real estate has been a safe investment, the last several years notwithstanding.

Real estate is a great example of an investment that appreciates over time. This makes real estate a good long-term investment and even a short-term profit play for seasoned investors. For instance, if you want to purchase an investment property that is valued at 300,000 dollars you will typically need about 20% down, or $60,000 as an investor. That can be as high as 30% or as low as 10% in some cases.

Investors who thought real estate could never decrease in value, and failed to hedge their positions found themselves with negative cash flow and were often driven into foreclosure or bankruptcy. Investor who bought on sound fundamentals with the help of Full Service Discount Realtors, with strong cash flow in place from the property, have weathered the storm.

When buying investment property in Madison, the first thing that you have to know is the rate of capitalization. This is the net rental income that you can get from the property divided by its purchase price. For example, assume you can purchase Discount Real Estate Franchise For Sale for 100,000 dollars and you are able to get a gross income of 14,000 dollars from the property. The total expenses add up to 4,000 dollars and that leaves the property's net rental income at 10,000 dollars. The capitalization rate on the property will be 10% (10,000 dollars divided by 100,000 dollars).

Cash on cash is calculated differently. If you paid cash for the property, $100,000 and you made $10,000 after expenses, your rate of return (Cash On Cash) is 10,000/100,000 or 10%. If you borrow money to buy a property your cash on cash rate of return changes. If your investment (Down Payment of 20%) in the property described above was $20,000, and your mortgage payment was $6,000 then you net rental income was $4000 per year.

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