To Leverage or not to Leverage in Your Real Estate Investment Business
Let’s face it, debt is intimidating. It’s easy to come up with a whole host of reasons why choosing not to leverage properties is a safe and smart choice. These reasons aren’t unfounded — avoiding debt minimizes risk, simplifies the investing process, sharpens an investor’s focus, and builds confidence. It’s also completely possible to find a really great deal on a free-and-clear property that will give you a high return – if you’re willing to be patient and hold out for it.
Before 2008, in a booming, sky’s-the-limit housing economy, debt was seen as a beneficial and necessary tool for building real estate wealth. Once the bubble burst and so many home builders, owners and investors were left holding the bag, many in the housing industry began singing a different tune.
As the housing market has begun its slow climb upward, debt-free investing has become increasingly popular, particularly among younger, newer investors looking to escape mistakes of their predecessors.
While the idea of free-and-clear ownership is appealing, shunning all debt may not always be the wisest course of action. Here are several reasons why leveraging can work to your advantage:
You have more freedom and more options.
Choosing not to leverage essentially means that you are tied to one property (or at the least, far fewer properties than may be possible with leveraging), with no opportunity of diversifying or trying anything new until the house is sold, or you save enough income to buy another property. It also means that you’ll have to wait for the perfect property to come along before you can begin to make money, and that there isn’t much of a safety net if something goes wrong.
You can make more money.
Investing $50,000 in a single house will net you a consistent, if small profit. Spread the same $50,000 over three properties, and your profits will make an immediate jump.
You can make money faster.
Can you get to the same profitability margin by buying cash as you can by leveraging? Sure – but it may take longer, as you may have to keep turning over properties slowly to have enough to invest in a higher volume and receive a higher ROI.
You’ll have more money for necessities
Leveraging properties leaves cash in your pocket for repairs, maintenance, vacancies, and unforeseen problems. Unless carefully planned (hopefully adding on a nice budgetary cushion) sinking all of your cash into one property can leave you stretched thin, and make day-to-day operations a struggle.
Your long-term ROI may be higher
Three houses all appreciating at once will give you a higher eventual ROI than a single house building equity all by itself.
All of this being said, debt is a tool that must be used as wisely and as sparingly as possible. Leveraging properties requires discipline, organization, a level head, an understanding of the market, access to beneficial tools like Find Private Moneylenders, and mostly (this can’t be stressed enough), a good plan.