WTH is Leverage?
March 1, 2024 - Written by Jamie Palmer, President/Broker of Power Properties
When people talk about investing in real estate inevitably you will hear the word “leverage”, to which many of you might say “What the heck is leverage?”
Let’s suppose you had $500,000 in cash.
If you purchased one house, paid in full with that cash, and the value of the house went up by 5% per year, then in one year the house would be worth $525,000. You gained $25,000.
Now let's suppose you had $500,000 in cash, but instead of using it to buy one house, you bought four houses each worth $500,000, put a 25% down payment ($125,000) on each of them, and got a mortgage for the remainder of the purchase prices. If the value of real estate went up 5% per year, then each house would be worth $525,000 in one year. You gained $100,000 ($25,000 x 4).
That additional $75,000 that you gained is the result of leverage. This is what makes investing in real estate so powerful.
While it’s true you can leverage stocks (borrow money to buy stocks), the difference is with real estate you have someone paying back the mortgage/loan for you in the form of rent.
Some of you might be saying “I don’t have $500,000”... however given the rapid escalation in value in Calgary real estate over the past 2 years, I would say anyone who purchased their house in 2019 or earlier has significant equity in their home. Equity you could be leveraging.
Is now a good time to purchase more rental properties? I would direct you to the following articles:
Canadians are moving to Alberta in droves.
Canada’s vacancy rate reaches new low as demand outpaces supply
You can just read the three headlines together to know that home prices and rents are going to increase due to a shortage of supply and a sustained increase in demand.
If you are interested in using real estate to grow your personal wealth reach out to your property manager (who is also a licensed Realtor).