Real Estate Verses Stock, Part 1: Leverage

This is the first in a series of articles on the benefits of investing in real estate relative to stock.  Real estate investments have made more millionaires than perhaps any other form of investing and there are eight powerful reasons why.  

The first and perhaps the most powerful advantage is LEVERAGE.  Financial leverage occurs when a comparatively small amount of cash invested controls a large asset.  You do not have to own an asset to be rich you just have to control it.  Financial leverage takes the form of a loan or other borrowings, the proceeds of which are reinvested with the intent to earn a greater rate of return than the cost of interest.  Businesses expand their operation using leverage.  Real estate investors have made millions of dollars every year using the same financial power used by businesses to grow and expand.

Leverage is a powerful tool when investing.  Your stock investment is leveraged in a 401k when your employer matches your funds.  The employer adds to your money, typically 50¢ to $1.00 for every dollar you invest, up to some percentage of your income.  When an employer that matches dollar for dollar into your 401k, it is a 1:1 leverage play.

You can also buy stock on margin.  Buying on margin is borrowing from a stockbroker to purchase stock.  By law you can borrow no more than 50% of the price of the stock on margin, 1:2 leverage play.  Because of the interest paid to the stockbroker, stock purchases on margin are usually for only a short period. 

While these two types of investment leverage are good, the leverage available in real estate is huge.  When you buy a house with 20% down the bank provides four dollars for every dollar you invest for a 4:1 leverage play.  The leverage jumps to 9:1 when your down payment is only10%.  The following example shows how leverage can supercharge your investment.

Example:  $1000 investment of your money

Saving account                                          yields:   $1000 investment  - NO Leverage

Stock purchase on margin                         yields:  $1,500 investment - 1:2 Leverage

401k with dollar for dollar matching          yields:   $2,000 investment - 1:1 Leverage

Real estate with 20% down payment        yields;    $5,000 investment - 4:1 Leverage

Real estate with 10% down payment        yields;  $10,000 investment - 9:1 Leverage

Today many real estate investors will not touch an investment that requires 20% down.   They are throwing away free money!  For every $1,000 they invested, they would have leveraged an additional $4,000 of free money and controlled a $5,000 investment.  While 10% down is a more powerful investing move 20% down is a huge investing advantage that will launch your investment to heights unachievable by other types of investments available to the average investor.  Massive leverage is achieved without additional financial risk of using sub-prime loans, carefully worded contracts, expensive seminars, or taking advantage of someone’s financial misfortune.

As we explore the other seven powerful real estate investing advantages available to you as real estate investors, you will realize how these high leverage investment plays will continue to reward you day after day.  Leverage is the basic investing advantage that has made successful real estate investor wealthy.   GOT LEVERAGE?

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