Heroic Investing
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Use financial leverage like a hero

Remember, real estate investing is not rocket science. To understand it, you only need to latch onto a few critical ideas, one of which is financial leverage. When we say financial leverage, we’re referring to a concept almost everyone is familiar with but hardly anyone uses correctly. Let’s define it with an example. Policeman Tom is looking to buy a new house for his family. He finds one for $100,000 but, like almost every other American, Tom doesn’t have the cash on hand to plunk down and buy the thing outright.

That’s where the bank comes in.

Tom’s hometown bank likes him and agrees, if he puts up a 20% down payment, they’ll loan him the rest. Shazam! Without even realizing it, Tom just pulled off a crafty feat of financial leverage. He used his $20,000 to control a $100,000 investment asset (the house). At this point, Tom, like most people, begins dutifully sending his mortgage payment into the bank every month and, 20 or 30 years later, he’ll own the house outright – the American Dream.

But consider this. What if Tom instead continued to live in the house he was in and rented out the one he just bought? And what if the rent not only covered the monthly mortgage payment but gave Tom an extra one hundred dollars in cash flow? At the end of the mortgage term, the house is still paid off but Tom never paid a single cent.

His tenants paid for his house! Plus the value of the house is likely to have doubled twice in the meantime. Tom used $20,000 to gain ownership of a $300,000 investment that continues to earn him money in rentals each and every month.

That’s heroic investing.

The Heroic Investing Team

Flickr / nancyarora2020

 

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