This is the second post in the Why I Like Real Estate series. If you haven’t already, check out Part I.

The concept and power of leverage is a simple one, yet it’s often misunderstood or not thought of when people think about real estate. I find this interesting since leverage is one of the most powerful reasons to invest in real estate.

All too often I’ve heard people say how real estate consistently under-performs the stock market, and we should therefore just invest in the stock market for long term gains. This may be true if you look at total gains, but leverage changes things.

Leverage basically means that you’re able to combine someone else’s money with your own money to buy an asset or invest in something. While it’s true that you can do this in the stock market with a margin account, most people who think real estate is too risky definitely would think a margin account is too risky.

By leveraging your money you’re able to multiply your gains, and this is why real estate can be (notice I said can be) much more profitable than other investments like the stock market. I suppose it would be best explained with an example:

Say that you put $10K into the stock market and you average an annual gain of 20%. Most people would say that this is quite an extraordinary rate of return. So, after 3 years your $10K would have grown to $17,280 which is outstanding.

Now let’s say that you put that same $10K as a 10% down payment on a rental property and finance the other 90% (this is the leverage part). We’ll also assume a rather conservative gain of 3% annually, well below what the stock market earned in our example. After three years, the property would then be worth $109,272 meaning that your $10K is now worth $19,272.

So as you can see, you’re money will still grow faster with an investment property appreciating at 3% than in the stock market at 20%. I understand that there are many other considerations, but you can’t dispute the power of leverage. This is why leverage is another one of the reasons that I like real estate.

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