Welcome to the blog. Today we focus on what is and how to use leverage in Real Estate. When I was small, my Dad, a mechanic, showed me how to change a punctured tire on a car. I could not do it myself as I was not strong enough, so to ensure I would always be able to fix problems, he showed me how to use leverage to change the tire. Using a more extensive tool attached to the wrench, I was unsuccessfully trying to remove the wheel nut; it gave the extra power or “leverage” to turn the nut and remove the wheel. This is an example of leverage, and I will explain how it is used in real estate.
The first thing I want to show you is how to leverage financially in real estate. This is a way to buy a property with only a portion of the money while you receive full ownership of the entire property. It’s the reason why real estate investing is so appealing. In some cases, all you need is a 5% deposit or down payment to start the process if you are a first home buyer, and in some places in the USA as little as 3% to start with. This rises to 20% with your second property investment as the first one is considered your home. It remains a small amount compared to the total you receive and represents an excellent value investment. Property for sale at $500,000 requires just a 20% which equates to a $100,000 down payment which gives you the entire house and the appreciation accrued during your ownership of the property. That is a fantastic deal, in my opinion. But is it the only benefit you can leverage in real estate?
Well, no, there are a few other areas you can leverage in real estate. One of them is time leverage. I will give you an example. We all have 24 hours a day, seven days a week, and time is money. So if you’re an employee working for a company, you will have an hourly rate that you may earn $20 or $40 an hour. So even for those who work on a salary and make $60,000 a year, that works out to about $30 per hour earned during a typical 40 hour week. So if you want to earn extra income, you will have to work overtime if available. So if you need to make an additional $1,000 a month and you make $40 An hour, that means that you need to work an extra 24 hours in the month or 6.25 hours a week extra which is a lot.
These figures can fluctuate depending on the company you work for, as each one has its different rates, but it illustrates my point concerning time and its value. If you are on a fixed salary, this option won’t work as you are expected to stay until the job is completed, and this may result in your time being leveraged by the company to their advantage. I have experienced this in past employment, and it’s not an enjoyable experience to have your personal and family time compromised. It’s a situation many businesses use to their advantage. Here is an example: let’s say an electrician charging $100 an hour. He hires two apprentices for $25 an hour when he is busy, each working 40 hours a week. He pays an apprentice a rate of $25 an hour. So he’s got two employees at $25 an hour working 40 hours a week which is a cost of only $2,000 a week. However, he bills the client for 80 hours at his rate of $100 per hour, which gives him an extra income of $8,000 a week, resulting in a profit of $6,000 after hiring two people.
When you are working in real estate, in my experience, you need to leverage time. If you are a contractor, for example, and you want to complete work on the property, it may be in your best interest to hire people to help, especially in time-consuming jobs that will take too much time to do it by yourself. When you finish the property quicker, you start earning rental income faster, allowing you to invest in another property and continue the process. Speaking from experience, my advice is if you are completing a fix and flip, it’s prudent to get a qualified professional to do it right the first time, and that is how you can leverage real estate.
So there are three ways that you can leverage real estate, financially, hiring somebody at the time and hiring somebody and using their skills. So there you have it. So now you know what to do. Start leveraging as much as you can.
If you want to learn more about investing in real estate then join our free Facebook group by clicking right here!