With leverage you can increase your return on investment and build wealth faster than if you paid 100 percent cash for your properties. But leverage also increases risk. Highly leveraged acquisitions expose you to greater potential loses.
In theory, the more you borrow and the less cash you invest in a property, the more you increase your cash returns. Besides annual income, your rental properties will appreciate in value over a period of years. When you add returns from annual net rental income and appreciation, high leveraged properties may produce phenomenal annual rates of return.
Managing risks
1. Buy bargain-priced properties
2. Buy properties that you can profitably improve
3. Buy properties with below-market rents that you can raise to market levels within a relatively short period (6-12 months)
4. Buy properties with low-interest financing such as mortgage assumptions, adjustable-rate mortgages, buy downs, or seller financing
5. Buy properties in up-and-coming neighborhoods that are soon to be revitalized
6. When all else fails, to reduce the risk of high leverage to a comfortable level, increase your down payment to achieve a lower loan-to-value ratio and lower monthly mortgage payments.
7. Never expect the value of real estate, stocks, or any other type of investment to increase by 10, 15, 20 percent year after year
8. Beware of negative cash flows
9. Don’t overextend yourself
10. Even when the financing looks good, avoid overpaying for a property because you invite financial trouble
^McLean, Andrew, & Eldred, Gary W. Investing in Real Estate. 5th ed. New Jersey: John Wiley & Sons, Inc, 2006
