Dear Claire, What is leverage?
Today on Dear Claire, Heather joins us to talk about leverage.
What is leverage, what are the pros and cons, and how does the real estate market affect it?
At the most basic level leverage is buying a $300,000 house and using a loan. Real estate at its absolute best I get a $300,000 asset that I bought for probably $15,000 down, if it’s my principal residence. If I invested that same $15,000 in the stock market, that would potentially yield about 5% a year as well. But instead I have a $300,000 investment that on average, at least for last hundred years, should be gaining about 5% a year. If that is the case, after one year, the $15,000 stock market investment yields $750, and the $300,000 property yields $15,000! On that $300,000 principal residence your down payment can vary from 5 – 20%, which you mean you’re leveraged between $15,000 and $60,000 depending on your loan.
The great thing about it is you’re gaining equity on a significantly larger amount of funds than you would be if you placed it in the stock market. We are strong believers in gaining wealth through owning property. Our parents did it and it’s kind of in our blood. Historically real estate has gained had gains over the years, but over the short term you’re much more at the mercy of the market and potential losses. If you are in a neutral market or a decreasing the market when you leverage yourself, you’re going to ultimately be losing more. When we say short term we’re talking about 5 years or less. With some current volatility I wouldn’t recommend a three to five hold on any investment right now. If you can hold on to it for longer you’ll be in a better place.
We’re going to continue to specialize in what’s happening with the market and a lender is going to specialize with what you can qualify for, what you can do for a down payment, and what makes the most sense for you.
I want you to remember that for the last hundred years, the National Association of Realtors has been keeping track of what the housing market has done. We continue to see an increase of 5% over the long run. That include the Great Depression, the 2008 recession, and all the other peaks and valleys over the last hundred years – they’re still indicating a gain of around 5% on average. Year to year can vary greatly as it has over the last 10 years with a 40% gain in value. We don’t expect that to continue, as it’s not sustainable. If you invest in long term using real estate, it’s a practical investment that lasts. The most paramount thing to consider is through all the peaks and valleys is to be able to hold still through the valleys until we see another peak, because that’s what’s going to benefit you the most.
We’re happy to discuss how best to use your leverage to your advantage because we strongly believe in owning property and growing your wealth that way.
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We have a blog that coincides with this today. Please check it out and bring us more questions. We’d love to answer them. Take care.