The What, Why, And How Of Real Estate Leverage
Leverage is a way to acquire real estate that is worth more than the asset or equity of the investor to increase wealth. The investor usually leverages his asset or equity thru a mortgage. The return on investment of real estate significantly increases the wealth of the investor.
Real Estate appreciates in value over time. In fact, the real estate doubles every four or five years. With assumption of two percent inflation, the real estate appreciates four to seven percent every year. Thereby, the investor receives four to seven percent return of investment per year. And, the real estate tends to be a stable as an investment on the long run.
For example, the investor has 0,000 as an asset or equity. He looks for way to leverage 0,000. He can purchase a home for 0,000. With a seven percent appreciation, the home appreciates to 0,500 (0,000 original value + [0,000 home value * 7 percent]) after a year. The return of investment equals ,500.
Now, he looks at another scenario. If he purchases a home that is worth 0,000 with 0,000 as down payment, the return of investment drastically rises to the roof. With a seven percent appreciation, the home appreciates to 2,000 (0,000 original value + [0,000 * 7 percent]) after a year. The return of investment equals ,500.
There are risk involve too. Before any investor to proceed with 0,000 home purchase, he needs to evaluate the affordability and gross income. Mortgage Lenders measure up the gross income to Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS). The GDS means a certain percentage of gross income must not exceed the mortgage payment, while the TDS means a certain percentage of gross income must not exceed mortgage payment, home expenses, and total debt. As a general rule, the mortgage payment must not exceed forty percent of gross income. At the end, it all depends on the mortgage lender.
At this time, the investors still take advantage of two monster mortgage tax deduction from Internal Revenue Service (IRS). First, the discount points which are paid upfront to lower the mortgage payment can be deducted on income tax return. Another, the mortgage interests which are paid for every mortgage payment can be deducted on income tax return as well. Mortgage Lender sends a form which tells how much mortgage interest for the year. Consult with your trusted tax advisor and current tax laws for more information.
Leverage works best with real estate property that appreciates. The history of the neighborhood and property type gives the possible future outcome of home values. The home improvements also add values to the property. The installation of carport, renovation of kitchen, construction of rooms, and conversion to hardwood floor provide the best return of investment among home improvements. The economy of the region also delivers clues how the real estate will carry on the next few years. During the strong economy, there are more home buyers. As the demand for home increases, the home values increase as well.
About the Author: Dennis Estrada is a webmaster of mortgage calculators website that gives access to many resources, and calculators for mortgage.