Larry Goins

Understanding Leverage and Return on Investment (ROI)
by Larry Goins

Real Esate Investing Returns Levarage

One of the most common advantages of real estate investing is the financial leverages that can give a return on investment. The sale of investment property is highly competitive; you have a little product to sell with too many brokers and a good supply of buyers and a few real estate sellers. It is because stakes are high and real estate is a high-performing asset that investors use levearge to close deals.

The leverage appreciation of the asset value is greatly deal of the return on investment which is normally based on income of cash flow properties. Leveraging means that the asset being purchased; portion is paid from buyer and the balance comes from a lender.

The loan will be repaid by the occupants rental payment to the new buyer therefore it increase the value of the entire asset and it is a real return on the original amount invested. To explain further, the original loan will eventually be paid off by the tenants and the investor will profit in the long run depending on the term of the rental.

So basically you will pay the 10% base on equity and the 90% through lending but the idea is you won’t be paying the lending through your own pocket instead the renter will pay it for you and in the right time when the loan is paid. Then you can have the entire asset.

Understanding Leverage and Return on Investment (ROI)

To give you an overview I will give a simple numbers and explain how it works. Suppose you contract to buy a one hundred thousand dollar building and with a 25 percent down payment and another 5 percent in loan points, closing and other costs. Doing the maths the buyer normally pay $30,000.00 of his or her own capital. If the property increases in value at 3 percent per year then normally the worth of the property increases by 3 percent. By means of appreciation alone the investor gains a return of investment of 10 percent with just the 3 percent appreciation.

Return on Investment (ROI) = (Appreciated Value – Original Value) ÷ Amount Invested

If we add the appreciated 3 percent of ROI as shown above the cash on cash return on investment is even greater. Since the mortgage is paid from rent collected it is an ROI since the investor sells or refinances through the renter. However, in interest-only loans, which are common in commercial real estate, there is no principle pay-down.

Leverage Real Estate Investing

When you plan to buy investment real estate make sure you don’t pay it all through your own pocket make sure you only pay part of it -  the most is 30 percent  - and the rest through loan. So normally the asset is being paid partially by you and the lending company pays the rest. Once you have closed the deal quickly get the property rented.

The rent proceeds will be used to pay the mortgage so in due time you will gain a 1,100% return of investment. As show above on the appreciation alone you will gain a 3% increase of your real property value that does not include the entire value on the succeeding years. Normally you only pay a little and the renter will pay almost the whole portion of the amortization. This is a great way to leverage your income and this explains how to leverage and get the return of investment.

Bonus Training Video: Calculating Effective Gross Income (EGI)

Larry Goins
Larry H. Goins is not only licensed as a mortgage lender and mortgage broker in North Carolina and South Carolina, he is also licensed in both North Carolina and South Carolina as a Real Estate Broker and General Contractor. He is a member of the North Carolina Association of Mortgage Professionals and a member of the National Association of Mortgage Professionals.

Over the past few years, Larry has served as President (2003 & 2004) of the Metrolina Real Estate Investors Association in Charlotte NC, a not-for-profit organization that has over 350 members and is the local chapter of the National Real Estate Investors Association.

In addition to conducting his own sold out 3 day Dream Big & Wakeup Wealthy Boot Camps several times a year, he is also an active real estate investor and speaks at various Real Estate Investment Associations about investing and finance.

Between speaking engagements and mentoring other investors, he oversees the daily operations of Investors Rehab, Inc., of which he is a co-founder and officer. Investors Rehab, Inc. is a real estate investment company that buys and wholesales 10-15 houses per month to other investors at 70% of ARV.

Larry Goins is also the Owner and a Managing Member of Financial Help Services, Inc., a Mortgage Broker and Lender specializing in Investor Loans. Financial Help Services, Inc. offers traditional and hard money loans to investors.

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