Leverage in Real Estate

Let’s say that tomorrow, you went to a bank and told them that you would like to invest in some stock. You tell them that you’d want them to let you borrow three times the amount you are investing (so if you were to invest $25,000, you’d like them to loan you $75,000). You tell them that you’d even accept a loan equal to how much you’re investing (so if you were to invest $25,000, you’d like them to loan you an equal $25,000). Needless to say, the bank will give you a clear answer: No. There is too much risk and uncertainty, they’d likely say. However, with Real Estate, it’s not uncommon at all to have a deal where you put down 25% and the bank to put down the rest, 75% in this case. The reason? Real Estate, with the right partners and projects, has minimal risks and clear paths to profit and wealth. It is known how difficult it is for banks to part with their cash, so you can imagine that if banks are willing to put this much cash in the deal, they are quite certain that the project will have a successful and profitable return. This is the attractiveness of leverage: making money on the bank’s money. Contrary to the normal practice of the banks making money on people’s money!

The beauty of leverage is that you pay the fixed rate that you negotiated with the bank in the beginning, and anything made afterwards is yours. Additionally, as many people know, the interest rate been historically at its lowest meaning this is a great time to take advantage of unique tool of leverage to improve one’s wealth.


By: Aziz Amiri