In real estate, leverage is an extremely common tool used among seasoned investors. While it is true that there is a population of investors who use cash, either because they don’t think it will help or they’re afraid of debt, leverage is one of the best tools you can utilize. Everyone knows there are costs associated with debt, but few take the time to think about the huge benefits. By using leverage from hard money lenders, investors can enhance their projects in many ways:
Work on More/Bigger Deals
One problem with using all cash in real estate deals is that it becomes difficult to invest in higher dollar projects, which means the high dollar returns are also difficult to come by. Also, you won’t be able to work on as many deals either without some assistance from a lender. To illustrate this, let’s assume that a real estate investor has $100,000 in cash to invest. You would likely have a pretty hard time finding quality properties to invest in with that budget. With the use of a hard money loan you could easily finance properties worth up to $500,000! Meaning you can now work on larger or multiple projects.
Multiply Your Returns
By utilizing debt in your real estate deals you can greatly increase your ROI. This is because you’re now putting in fewer dollars and at the same time earning more in the process. For example, consider that you’re purchasing a property for $100,000 as a fix and flip investment and plan to sell it for a profit of 20%. After you add up all of your expenses and time put in, you will take home $20,000. Not too bad, right?
Now, let’s imagine now that you decided to take out a hard money loan. With leverage, you could use that same $100,000 as a down payment, but now instead we’re investing $500,000 in real estate (thanks to a $400,000 loan). If this earns the same 20% yield, you’ll take home $600,000 from the sale. Once you pay back the loan, your own initial capital, and interest, you profit $72,000! You’ve not only earned $52,000 more, but you turned a 20% ROI into a 72% ROI.
The world of real estate has plenty of tax deductions, one of the most significant, however, is interest. This can be very significant when using a hard money loan. These loans are very popular with investors in fix and flip transactions because when the tax man comes knocking you can save a substantial amount of money.
Leverage can be a great tool for all real estate investors. Whether you are doing fix and flips, construction, commercial bridge loans, or buy and holds, Loan Ranger Capital is here to help you succeed. If you’re ready to start investing or want to increase your returns give us a call and we’d be happy to see how we can help.