Morning Opera at Trieste: Real Estate Leverage

The purpose of using real estate leverage is to expand your cash on cash return, internal rate of return and to preserve cash. It should never be used to stretch your financial capabilities.

Simply put, leverage is the ability to control large dollar amounts of a commodity with a comparatively small amount of capital.

The dated concept of only putting 20% down to buy a property is simply arbitrary and means very little today. I evaluate each property on it's own financial merit as if it was a stand alone business. The main reason I have primarily used 20% down to acquire houses was because it provided me with the best financing from my lender. And, I like cheap money.

Robert Kiyosaki: "Rich people use more leverage than poor people. If you want to be rich, you need leverage. If you want to be rally rich, you need a lot of leverage."

Risk: The person who puts down 50% to buy a property assumes half the risk and the person who puts down 0% assumes no risk. No wonder the rates are lower for high down payments!

Despite what the media has written about 100% financing being more risky, one needs to know more about the transaction before making a blanket claim like that. Look at these two scenarios and tell me who is at more risk financially:

Buyer is is looking at two great houses. One is $400,000 and one is $325,000. He is comfortably qualified to borrow $325,000 by his lender and has very strong credit and job history. If he buys the $400,000 house he will put down 20% and borrow $325,000 using a 5-1 ARM. If he buys the $325,000 house he will put down 0% and borrow $325,000 using a 5-1 I/O ARM. WHY IS THE SECOND SCENARIO ANY RISKIER THAN THE FIRST? It isn't, although most bubble enthusiasts would expect him to default in the second case just on the basis of him taking 100% financing.

John Paul Getty: "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."