Using Leverage to Maximize Profits
People watching HGTV on any given night are more than likely to stumble across a house flipping show. People have become fascinated with watching these seasoned real estate investors take a run-down, distressed property and with a few dramatic unexpected twists and turns, turn it into an unrecognizable, beautiful home all while bringing home a nice sized profit. The question on many people’s minds is how do they have the money to do all of these deals?
The answer to that question is simple: leverage. Leveraging capital frees up investors to do more deals and spend less of their own money out of pocket. The ability to provide fewer out of pocket costs also increases the investor’s bottom line and allows them to bring in higher profits.
As an example let’s say that investor A wants to flip a house with a purchase price of $150,000 with $50,000 needed to rehab the property without using any leverage and putting up only their own money. Once investor A finishes the rehab they want to resell the house for $350,000 after running sales comparisons for the area and they amazingly are able to find a buyer who will pay the full asking price for the house. Remember that investor A put in $200,000 of their own money so they bring home a little under $150,000 in profit once you factor in the realtor fees, not a bad profit but let’s try the same scenario with investor B who wants to leverage their capital.
Investor B uses a hard money loan and only puts down 10% of the purchase price and rehab, so they end up only paying $20,000 of their own money to fund the deal. They are also able to resell the home for $350,000 and after paying back their loan plus interest as well as the realtor fees they earn a profit right around $170,000 after only putting in $20,000 of their own money. Since they were able to put a 10% down payment on one property, investor B was also able to finance another property at the same time and work on another project.
Leverage is a great tool that real estate investors have that allow them to put less of their money into one deal and do multiple deals and increase their overall profits and return on investment.