How Leveraging Your Real Estate Investments Increases Your Return on Investment

Leveraging your real estate investment means using financing to increase your return on investment.  So how does this work?  Let’s look at two scenarios to illustrate how this is possible.

Scenario 1:

An investor purchases a rental property for $90,000 cash and puts $10,000 into improvements for a total investment of $100,000.

He or she then finds a renter and leases the property for $1,300 a month or $15,600 annually.

He or she has expenses of 35% for taxes, insurance, management fees, maintenance and a vacancy factor, equaling $5,460 annually and creating a net operating income of $10,140.

Since the investor’s Net Income is $10,140 and his total investment is $100,000, his return on investment equals 10.1%.

  • $15,600           Gross Annual Rent
  • –  $5,460           Annual Expense
  • = $10,140           Annual Net Operating Income
  • Divided by   $100,000           Total Investment
  • ROI           10.1%           Annual Return on Investment

Scenario 2:

If this same investor finances the purchase of this property by securing a loan for 80% of the purchase price at 4.5% annual interest, amortized over 30 years, his or her mortgage payments will be $365/month.

He or she will put $18,000 down and $10,000 into rehab for a total investment of $28,000.

The investor’s annual mortgage payments will be $4,380, decreasing his or her net annual income to $5,760; creating an annual return on investment of 20.5%.

  • $15,600        Gross Annual Rent
  • –  $5,460         Annual Expense
  • = $10,140        Annual Net Operating Income
  • –    $4,380         Annual Mortgage Expense
  • =   $5,760         Annual Net Income after Mortgage
  • Divided by     $28,000           Total Investment
  • ROI            20.5%             Annual Return on Investment

You can see from this example that an investor can increase his ROI from 10.1% to 20.5% by leveraging; thus doubling his or her income from the same monetary investment.