In 200 to 300 words, explain how leverage impacts your returns on real estate. Do any differences in leverage exist between residential and commercial real estate?
According to Smith (2010), “Leverage is a technique used by both people and companies to expand the potential for returns, while equally expanding the downside of any risks involved if things don’t work out.” By using leverage, you may be able to put a small amount as a down-payment or none at all to while utilizing debt to facilitate a return. One of the most common was to leverage an investment is through your own finances or through a mortgage. With real estate, there is always the potential for a good return; however, there is also the possibility that the investment could go in the opposite direction if prices decline. The goal of any investor is to find opportunities that generate the highest return possible with the least amount of risk (Turner, 2017).An example of leverage is if a house is purchased for $800,000 with a 20% down-payment ($160,000). The mortgage obtained would be 80% for a loan amount of $640,000. Property values are expected to increase by 4% per year; therefore, in a 12-month period, the property value increases by $32,000. In this example, leverage is favorable since the value increased to $832,000. It is important to remember that just as leverage can work in your favor, it can also
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