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So you want to be a wealthy and successful real estate entrepreneur? I hope you know how to leverage. Leveraging is using a property to its maximum advantage in order to buy more property or other assets. Leveraging real estate property that you own to buy more investment property is a tried system that is used by many real estate investors.
What Is Leverage In Real Estate
Let’s say for conversation that Paola, a newbie that is doing well as a real estate investor for the short time she has been in the game. Paola used her life savings to buy two SFR properties about two years ago and she leased them out. She has been collecting steady rent on both properties since she purchased them.
Both properties were purchased using hard money loans. Paola put a down payment of 20% on each property, her interest rate on each loan is 8% and she has a 5 year loan. Just after Paola purchased the properties the market shot up. Property values went to their highest in quite some time and her properties are now 20% higher than the day she purchased them.
Paola was driving home from a meeting one day and she came across a “for sale” sign on a two unit property in a neighborhood near her first two rentals. She called the agent and discovered that the property was reasonably priced due to repairs needed to bring the building up to code.
Paola went to see the property then did some numbers on what she needed to purchase and repair the property. Knowing that she was two years into a five year loan on her other properties Paola knew it was time for her to start some planning for the future.
Doing The Research
She spent the next month or so doing research on iQM mortgage loan programs for rental properties. IQM mortgages are loans for investment property that in most cases require only a lease agreement to qualify. The typical interest rate on an iQM program for a borrower with a 700 plus FICO score ranges between 5.75 to 6.5% for a 30 year fixed loan.
Paola called the agent and made her offer. She informed the agent that she was going to refinance (leverage) her two investment properties in order to obtain the funds needed to complete the purchase. The agent opened up escrow and Paola began her refi process. She decided to refinance into a 30 year fixed loan at 6.5% on both her properties. She pulled enough cash out from her refinance to use as down payment for the two unit property and make the needed repairs. The best part is that because she lowered her interest rate on both properties, her monthly payment is just shy of what she was previously paying with her hard money loans. That’s with the additional cash out.
Within a two year period Paola has now acquired three rental properties and she leveraged her original investment properties to obtain another. What Paola did is a good example of leveraging real estate to build wealth. She took existing real estate properties that she already owned and leveraged them just enough to acquire another good property for her portfolio.
Having Patience In Real Estate Investing
Investing in real estate takes hard work and above all patience. Especially when your funds are limited. Unless your main source of income in making you millions of dollars per year that you can invest in more properties. Then the best way to acquire more properties is to do as Paola did and leverage existing properties.
Keep in mind that the first few years are always the toughest. You spend your savings on buying a property then most often than not you have to wait a year or two to see some results. During this time it’s best to stay motivated. Keep your properties in good condition so that it’s easy to lease out if you have a vacancy. Keeping what you already own operating efficiently will go a long way in helping you achieve your goals.
Full disclosure: Leveraging is not the only way to acquire property. In fact there are many other ways to build up your portfolio. You could team up with a few partners or look into real estate investment trusts. Some of these trusts produce decent returns and nowadays many companies are using the internet to crowdfund projects that also produce gains.
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Today the attraction of owning real estate is all the rage. Some investors want passive income from owning multiple SFR or multi family rental properties. Others want to buy, hold a few years then liquidate. Then you have fix and flippers. Of course all have one thing in common, we all want financial independence and the ability to schedule our own lives as we see fit.
Real Estate Investing Is Not Easy
So, why is it that everyone isn’t a real estate mogul making millions per year? The answer is that it’s not easy. Discipline and planning is crucial and you need both time and money. If you don’t have the time to put in then you have to have money to hire people to put in the time for you. If you don’t have money then you better start saving.
A good idea if you are light on funds and don’t already own a house is to buy a starter home, something small for you to live in. After a year or two buy something bigger and rent out that starter house. That can get you in the door and by paying down the balance on the mortgage as you live in the property you will be lowering your liability and increasing your equity. This will help you later on as in our leveraging example above.
Always remember that leveraging real estate to build wealth is a slow and steady course. It will take a while to achieve your goals. Many investors make millions of dollars every year and live the lifestyle of their dreams so it’s definitely worth the patience. Take your time and build your business one property at a time if need be. Build a good business model and make sound financial decisions. If you do? Then you will be well on your way to reaching your goals and reaching financial independence.