Real Estate leverage is the use of borrowed money to increase your profits in an investment. Building wealth via real estate requires the use of leverage. Let's assume you have $100,000 to invest and you purchase a small income property for $100,000. Income properties have been appreciating at an average of 7% per year. At the end of the first year of operation, your property is worth $107,000. At the end of year two, it is worth $114,490.
Now let's assume that you put your $100,000 down on a $500,000 income property. At the end of the first year, it is worth $535,000. At the end of the second year, it is worth $572,450. By using leverage or borrowed money to purchase a larger income property, you have increased your profit by $57,960 in just two years. To get the full advantage of leverage, put the minimum down on a good property which has a strong likelihood of appreciating in value. Stay away from questionable properties in run down areas.
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