The power of leverage in Edmonton real estate
Leverage is a very powerful tool when it comes to investing your money. It is something that a lot of people don’t even consider, but it has a tremendous amount of impact on your financial situation. I’m going to break it down as simply as I can.
Imagine that two people each had $20,000 to invest.
Let's say Dave is our first subject. He decides to use his entire $20,000 to purchase stocks in the stock market. Very simple. Dave now controls $20,000 worth of stocks and will feel the gains or losses as that investment fluctuates with the market. If for example his stock portfolio increased by 10% that means Dave would have made a $2000 profit.
$20,000 x 0.10 = $2,000
Let’s call our second subject Dianne. She decides to use her $20,000 in a different way. She uses it as a downpayment on a $400,000 home, which is a common price point in the Edmonton market. Now Dianne controls a $400,000 asset because she used leverage. Simply put, she borrowed the bank's money to finance the purchase. Because of this she now feels the gains or losses of her investment, but it is a much larger investment than Dave’s. If the value of Dianne’s house increases by the same 10%, her profit would be $40,000.
$400,000 x 0.10 = $40,000
That is a $38,000 difference between Dave and Dianne’s profit when they both started with the same amount of money, and have the same 10% gain. That is the power of leverage in Edmonton real estate.
This is an exciting concept and has the power to make you a lot of money, this is one of the many reasons that real estate investors feel that there isn’t a better type of investment out there. However leverage is a double edged sword, it can be an amazing tool, or it can cut you. Using leverage works just as well at losing money as it does making it. Using our example from before means that a 10% loss would be the same numbers.
Keep in mind this is a very oversimplified example. No fees or other variables have been factored in and I'm not an accountant or financial planner, but it does illustrate the power of leverage. Whenever you are thinking about making a real estate purchase in Edmonton and area, or really anywhere, this is something to keep in mind.