The Benefits of Leveraging in Investing

Did you know that investing in real estate is the single investment where you can use someone else’s money to earn a return for yourself? It’s one of the many reasons investors flock to this reliable asset class. Leverage, is one such tactic. It allows an investor to utilize the value in his or her principle residence to increase the potential for ROI. But there’s more to it, and that’s what we’ll discuss here.

 

The Guidelines

By using the leveraging technique, investors are able to gain up to 65-80% of the value in their primary residence. It’s important to note, however, that every lender’s guidelines are different and where you live will determine the amount that can be leveraged. It also depends on the type of lending you need. If, for instance, you want to refinance your home, the amount will be different than if you are wanting to secure a line of credit for another purchase.

 

Increasing the Earnings

The benefits of using this approach are multi-fold, but the biggest is likely the freedom a refinancing option provides to a potential investor to then take that money and put it toward the purchase of a rental property. More seasoned real estate investors have been using this tactic for quite some time. But to get started as a beginner, you must first understand the equity you have in your primary residence and appreciate the truths about whether there is enough there to make a good investment.

 

Not Always Right

While leveraging works in many cases, there are some in which it should be avoided. It, quite simply, can be dangerous and work against you instead of for you if your home is in an area where values have declined. Here’s a scenario:

 

You made a down payment of $100,000 on your $500,000 primary residence five years ago. In that time, the value of homes in your area has depreciated year-over-year and left your home at a current value of $475,000. That is an equity loss of $48,750. In this instance, refinancing would not be a wise move as the total purchase price of the home could not be recouped.

 

The great news about real estate as an investment option, however, is that you can always hold onto it until values improve again. And, the likelihood is that they will.

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