The Importance of Leverage in the Real Estate Market | San Diego Real Estate | The Real Estate Jedi™

Summary

This video emphasizes the power of leverage in real estate investing and compares it to the stock market. The speaker explains that using leverage by taking out a mortgage allows for higher returns than an all-cash purchase. By demonstrating an example with a $100,000 property, the video shows how leveraging $25,000 can yield a 13% return, and with appreciation, it could jump to 23%. The speaker also highlights the benefits of physical assets, like insurance and tenant payments, compared to stock market volatility, and teases the potential of multi-family properties in future discussions.

Takeaways

• 😀 Leverage is crucial for maximizing returns in real estate investing.
• 😀 Comparing real estate to the stock market is often misleading, especially when assuming all-cash purchases in real estate.
• 😀 An all-cash purchase of a $100,000 property with $1,000 monthly rent yields an 8% return after expenses.
• 😀 Using leverage by putting down 25% ($25,000) and taking a loan for the rest ($75,000) increases the return on investment (ROI) to 13%.
• 😀 Leverage can result in a better ROI compared to all-cash purchases by allowing more capital to be available for other investments.
• 😀 Even after accounting for mortgage payments and expenses, leverage offers significant potential for higher returns.
• 😀 A modest appreciation of 3% in property value boosts ROI to 23% when using leverage.
• 😀 Real estate investments benefit from the appreciation of the entire property, not just the down payment amount.
• 😀 Tax deductions, such as interest deductions on the mortgage, further improve the return on investment in real estate.
• 😀 Real estate investments are backed by physical assets that can be insured, offering protection against property damage, unlike stocks.
• 😀 Even in the event of a market crash, as long as tenants continue to pay rent, mortgage payments can still be covered in real estate, unlike stocks which can lose value entirely.

Q & A

What is the main concept being discussed in the video?

The main concept discussed is leverage in real estate investing and how it can maximize returns compared to an all-cash investment.

How does leverage improve returns in real estate investing?

Leverage improves returns by allowing investors to borrow money, reducing the initial capital required, which can amplify the return on the investor's actual investment.

What happens if you buy a property with all cash, according to the script?

If you buy a property all-cash, your return on investment (ROI) is limited to the net cash flow generated from the property, which in the script example was an 8% return after one year.

What are the numbers for the all-cash investment example in the script?

The all-cash investment example in the script assumes purchasing a $100,000 property, renting it out for $1,000 per month, with $4,000 in annual expenses. This results in an $8,000 return, which is an 8% ROI.

How does the scenario change when using leverage, as per the script?

When leverage is used, you only need to invest 25% of the property price, which is $25,000, and take out a loan for the remaining $75,000. After expenses and the mortgage payment, the net cash flow is $3,200, and the ROI jumps to 13%.

What impact does appreciation have on the ROI when using leverage?

With a 3% appreciation in the property value, the ROI increases significantly. If the property appreciates to $103,000, the ROI jumps to 23%, as the investor benefits from the appreciation of the entire property value, not just the down payment.

How does the tax write-off impact the investor’s return?

The tax write-off, specifically the interest tax deduction, provides an additional $3,400 in savings, further increasing the return for the investor.

What is the advantage of owning a physical asset like real estate compared to stocks?

Owning real estate provides the advantage of insurance, which covers potential damage to the property. In contrast, stocks are not insurable, and losses in the stock market cannot be recovered through insurance.

How does leverage protect investors in the case of a market crash?

Leverage protects investors by allowing them to keep tenants in the property to pay off the mortgage, even if the property value decreases. However, stock portfolios do not offer this security, as a complete crash could leave investors with nothing.

Why is it important to be responsible with leverage in real estate investing?

It is important to be responsible with leverage to avoid overextending oneself financially. While leverage can maximize returns, improper use can lead to significant risks and financial challenges.

What does the script say about multi-family properties?

The script hints that multi-family properties offer even higher returns and are a favorite subject for the speaker. However, the topic of multi-family properties will be discussed in a future video.