Leverage
The definition of leverage is "The use of fixed costs in order to increase the rate of return from an investment." Leverage allows you to increase your rate of return.
It is best to understand leverage by the use of an example. What if you went to the bank and said that you have $10k but you want to buy $100k in a fund. And you want the fund to act as the security for the loan. What would they say? They would say forget it. Yet when you buy a house you can put down $10k for a $100k house and have the actual house (similar to the fund) act as your security.
This is where the real leverage works. Homes appreciate. What is appreciating is the $100k. Not just your $10k. If it appreciates at 5% a year then on $100k that equals $5k per year, or 50% on your original $10k investment. That means your original 10k grew at 50%, AND the loan is secured by the actual property. Try buying $100k for any stock offering with only a $10k deposit and then make 50% return on it.
Real Estate (Return On Investment)
Example 1: 100% Down
The Deal: To Purchase a Townhouse for $100,000
A) 100% down
B) 6 year hold
C) Sell for $200,000
The Gross Profit:
Return On Investment Formula:
100% Return on your initial investment!!
Real Estate (Return On Investment)
Example 2: 10% Down
The Deal: To Purchase a Townhouse for $100,000
A) 10% down
B) 6 year hold
C) Sell for $200,000
The Gross Profit:
Return On Investment Formula:
1000% Return on your initial investment!!
The definition of leverage is "The use of fixed costs in order to increase the rate of return from an investment." Leverage allows you to increase your rate of return.
It is best to understand leverage by the use of an example. What if you went to the bank and said that you have $10k but you want to buy $100k in a fund. And you want the fund to act as the security for the loan. What would they say? They would say forget it. Yet when you buy a house you can put down $10k for a $100k house and have the actual house (similar to the fund) act as your security.
This is where the real leverage works. Homes appreciate. What is appreciating is the $100k. Not just your $10k. If it appreciates at 5% a year then on $100k that equals $5k per year, or 50% on your original $10k investment. That means your original 10k grew at 50%, AND the loan is secured by the actual property. Try buying $100k for any stock offering with only a $10k deposit and then make 50% return on it.
Real Estate (Return On Investment)
Example 1: 100% Down
The Deal: To Purchase a Townhouse for $100,000
A) 100% down
B) 6 year hold
C) Sell for $200,000
The Gross Profit:
| Gross Sale Price |
$200,000 |
| Minus Purchase Price |
$100,000 |
| Gross Profit |
$100,000 |
Return On Investment Formula:
| Gross Profit |
$100,000 |
X 100 = 100% |
| Initial Investment |
$100,000 |
100% Return on your initial investment!!
Real Estate (Return On Investment)
Example 2: 10% Down
The Deal: To Purchase a Townhouse for $100,000
A) 10% down
B) 6 year hold
C) Sell for $200,000
The Gross Profit:
| Gross Sale Price |
$200,000 |
| Minus Purchase Price |
$100,000 |
| Gross Profit |
$100,000 |
Return On Investment Formula:
| Gross Profit |
$100,000 |
X 100 = 1000% |
| Initial Investment |
$10,000 |
1000% Return on your initial investment!!
