Understanding this is crucial if you want to become an ultimate real estate investor (or really any kind of investor).
This is the ability to create great profits by effectively controlling large amounts of other peoples money (investors, banks, the seller, etc...).
Here's a couple of examples to show you the difference in purchasing property with cash or leveraging OPM (other peoples money).
#1- Let's say you deplete your savings or 401k and purchase a property for $200,000 ALL CASH. It appreciates fast and within a year you sell it for $300,000.
You made $100,000 in profit, which translates to 50% on your money. Not bad.
Now let's look at the same situation using leverage.
#2- As an investor, you purchase a property for $200,000. You're an investor so you acquire it with little or none of your own money down and the seller carrys the financing (you make monthly payments to him), and pay him off within a couple of years by either refinancing or selling the property.
Or you get 100% financing from a bank/mortgage lender, still allowing you to buy the property with nothing down.
It appreciates and you sell it for $300,000.
After paying off your old mortgage of $200,000 you're left with $100,000.
What is your return on investment in this scenario? 50%? Nope. Your return is
infinite.
Even if you sold it for a $50,000 profit, your return would not be 50,000%. It is greater because you came in with none of your own money.
That makes your return on investment
infinite!
Compare it to the stock market.
Let's say you have $10,000 and invest that in the stock market and buy 1,000 shares of a $10 stock. (1,000 shares x $10 each= $10,000 total investment)
You watch the stock, it does great and in one year your stock goes from $10 to $25! Yippeee! That's a hundred and fifty percent (150%) return on your money. not bad at all.
Hopefully, you have $10,000, and you chose the right stock though...
If you can see the power in leverage and you use it to your advantage, you can create a very nice portfolio and perhaps...never have to work for anyone ever again....