Using Leverage to Buy Real Estate

Yesterday, I discussed using leverage to buy stocks and the risk associated with this practice. Perhaps the most common use of leverage is for the purchase of real estate. Like stocks, using leverage in real estate increases your purchasing power. Unless you pay cash for your property, you are using leverage and your property is used as collateral.

The use of leverage has made real estate investing very popular as a preferred method of building wealth. How else can you purchase an asset with a down payment of only 5 to 10 percent? For example, you can purchase a property valued at $500k for only $50k cash and a $450k mortgage. If your property appreciates, your return on investment is also magnified due to the high leverage.

Real estate has been widely considered a very safe investment due to the limited volatility compared to the stock market. However, the belief that real estate always appreciates has recently been challenged as home prices have plummeted in many cities across the United States.

The recent housing meltdown has left many investors wondering if real estate is still safe. My answer is yes, but common sense is still a prerequisite for making smart financial decisions. If you are going to buy a house, consider it a home, not an investment. Always make a minimum 20 percent down payment and don't depend on your property to appreciate in order to make future mortgage payments.