what’s the deal with leverage?

Leverage refers to the use of borrowed funds or debt to finance the purchase of an investment property. By leveraging borrowed capital, investors can amplify their potential returns and increase their purchasing power without needing to invest their own funds entirely. Leverage allows investors to control a larger asset with a smaller initial investment, thereby potentially increasing the potential for profit.

For example, suppose an investor wants to purchase a $500,000 investment property. Instead of paying the full purchase price upfront with their own funds, they might choose to obtain a home loan and only put down a portion of the purchase price, say 20%, as a down payment. In this scenario, the investor would leverage the borrowed funds from the lender to acquire the property, using their own funds as a smaller portion of the total purchase price.

Leverage can magnify both gains and losses in real estate investing. When property values appreciate, leveraging can amplify the investor's returns since they earn a return on the total value of the property, not just their initial investment. However, if property values decline or rental income falls short of covering debt payments, leverage can increase the investor's risk of financial loss. Therefore, it's essential for investors to carefully assess their risk tolerance and financial situation before utilizing leverage in real estate investing.