Real Estate - Leverage

 

             Leverage is the use of borrowed money to increase your profits in an investment.

             Building wealth via real estate requires the use of leverage.  Let's assume you have 

             $100,000 to invest and you purchase a small income property for $100,000.  Income    

             properties have been appreciating at an average of 7% per year.  At the end of the 

             first year of operation, your property is worth $107,000.  At the end of year two, it

             is worth $114,490.   Now let's assume that you put your $100,000 down on a $500,000   

             income property.  At the end of the first year, it is worth $535,000.  At the end of  

             the second year, it is worth $572,450.  By using leverage or borrowed money to

             purchase a larger income property, you have increased your profit by $57,960 in  

             just two years.  To get the full advantage of leverage, put the minimum down on a  

             good property which has a strong likelihood of appreciating in value.  Stay away from

             questionable properties in run down areas.

 

             When you purchase a piece of real estate, you make use of leverage when you

             borrow money towards the purchase price.  The principal of leverage can be

             demonstrated very easily with an investment model. 

 

Loan Points / Loan Origination Fees / Discount Fees               

 

                   Loan points are also known as loan origination fees and loan discounts.  

                   Loan Points are a fee charged to a borrower by lending institutions for the

                   privilege of obtaining a loan.  Lending institutions use loan origination fees

                   to generate income via lending activities.  Each point is equivalent to one

                   percent of the amount borrowed.  Loan origination fees are usually paid up front

                   in cash when you obtain a loan or mortgage.  As a borrower, you should shop

                   around to obtain the best deal, that is, the lowest interest rate with the least

                   number of loan points.   If you do not wish to pay upfront points, you can often 

                   obtain a loan with no loan origination fees.

 

                   The following factors can affect the number of points paid on a loan.  During 

                   periods of time when there is a large demand for loans, lenders may increase

                   the number of points paid to obtain a loan or mortgage.  The amount of risk

                   associated with the loan is another factor.  Generally, the greater the risk to

                   the lender, the larger the loan origination fees and the higher the loan interest

                   rate. 

 

                   Loan points paid to purchase a home are deductible.  If you are refinancing a

                   home, the loan origination fees must be deducted over the term of the mortgage. 

                   For income properties, you must deduct points over the term of the mortgage also. 

                   For example, you obtain a 20 year mortgage for $100,000 and pay 1 point.  To 

                   obtain the loan, you are required to pay 1 point or $1,000 up front.  You are

                   allowed to deduct 1/20th of this amount each year or $50.  If you pay off the

                   balance of the mortgage early, you can deduct all unused points in that year. Check


                   with your finacial advisor, tax preparer or CPA 

 Tien and Jim 

Your Real Estate Partners