Leverage can be defined as the use of borrowed capital to maximize an investment. Lenders see real estate as a less-risky investment than other investments. Lenders realize that real estate has tangible value and provides shelter - a basic human need.
Suppose you look at buying a home. You are not expected to come up with all of the money yourself. You will come up with the down payment but the bank will provide the majority of the capital. In return, you will pay the principal and interest over time. Lenders require insurance on the home and sometimes insurance on the mortgage, depending on the type of loan and the amount you put down.
Let’s look at an example of how leverage is used. Suppose you are looking to buy a home for $200,000 and the lender requires 20% down. You put down $40,000 plus closing costs and the lender puts down the rest, $160,000. Over time, the home appreciates (goes up in value). After 5 years, let’s say the home goes up by 4% each year. You sell the home for about $243,000. After paying for real estate agent fees and commissions, you could net about $225,000. If you subtract the loan amount, of $160,000 (assuming you had an interest-only loan and did not pay down principal, you are walking away with about $65,000. You had put $40,000 down and made $25,000 profit. That is a 62% return on your investment after 5 years. Not bad.
Banks do not give you leverage on other types of investments like stocks, CDs, crypto, or commodities due to the inherent risks of these investments. Real estate is a great investment for many reasons - leverage is one of those.
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