August 22, 2022

Using leverage is a great way to boost your return on capital compared to using only your money. Of course, there are pros/cons to using leverage/other people’s money but in my opinion you will fall behind if you do not use leverage.

There’s 4 benefits to using leverage that simply amplify existing benefits of real estate, and 3 added benefits that you don’t get at all by paying cash for real estate.

Benefits of Real Estate AMPLIFIED

1. Cash Flow: Using Leverage allows you to achieve more cash flow per month than without using leverage because you will have more doors/units that you are receiving cash flow. Having more doors/units also means that you are not at risk as much if you were only having one door/unit

2. Debt Paydown: Using leverage allows you to achieve debt pay-down. You do not get this by funding 100% of your deals. Using leverage allows you to acquire more deals which leads to a higher amount of debt paydown, similar to more cash flow, having more units utilizing leverage allows you to weather the storm of one unit/tenant not paying

3. Tax Benefits: It is important to note that we don’t want to invest in real estate solely for the tax benefits, but if you go back and watch some of my podcasts or speak with me one on one, you will learn that sometimes the tax benefits of investing in real estate are MASSIVE, and can even make or break a deal. One of the best parts of real estate is that you get tax benefits based on the purchase price of the real estate, not how much you put down, so someone buying a property with $100,000 in cash, or using $25,000 down and $75,000 of leverage- you get the same tax benefits ie: depreciation

4. Appreciation: What’s amazing about real estate as opposed to any other asset class is that you get appreciation on the nest egg/purchase price, not the amount of money you have invested, so for example If I had $25,000 to invest and I put it into the stock market I would get appreciation on $25,000 but in real estate $25,000 can buy me a $100,000 property which would get appreciation on the $100,000

Bonus Benefits

1. Liability Protection: This one took me a while to understand but by having 4 properties instead of 1, I am hedging my risk liability wise because instead of losing my one and only property and all of my equity ($100,000) I might only stand to lose 1 of my 4 properties, and ($25,000) of equity. By using leverage you are hedging your risk against potential liability claims

2. Market Risk Mitigation: This is the old saying “don’t put all your eggs in one basket” by having multiple properties (in different areas) you are able to protect yourself against any sort of market risk that is going on, this could be cities implementing rent control, perhaps large employers move away from an area, if you are invested in STRs, some areas have high and low seasons, there are many reasons why your investment might be subject to some sort of market risk, but by using leverage you are able to expand your investments and mitigate market risk

3. Time: This one is the biggest attribute out of all of these. The ability to get started sooner rather than later means you will experience learning lessons, the ups and downs, quicker than if you were to wait the time it would require you to buy rental real estate in all cash. By using leverage you will have an opportunity to put more deals under your belt which will get your equity building faster and allow you to become a more seasoned investor.

Case Study

To compare using leverage vs not using leverage, I created a case-study that outlines just that.

Person A

$100k cash

Buys one property for $100k using cash

Person B

$100k cash

Buys four properties for $100k each using 25% down payment

After 5 years…

After holding for 5 years, Person A has made $62,473 - a 62% ROI on their $100k. Not bad, right? Until you look at Person B, who made $178,405 - a whopping 178% ROI on their $100k.