How To Effectively Use Your Money To Invest In Real Estate

You want to invest in real estate. What's the best way to use your money? The use of leverage and OPM (other people's money) is what makes real estate such a powerful investment tool. Different people have distinct viewpoints regarding how much leverage and OPM is good.

The first thing you must remember is that your team of experts demands an equally competent mortgage professional. Depending on your goal and current situation, the scheme to acquire financial success may vary. The following examples present scenarios but they may or may not suit your specific situation.

In achieving your financial goals, we can look at some options you can consider. The best thing here is that you are in control when it comes to real estate. To start with, let's say you have $20,000 as a principal. If you are eyeing a $100,000 worth of property, you can deposit a 10 percent down payment. Alternatively, you can put in a 20 percent down payment for a $200,000 property. The rest is for you to decide.

Maybe you want to ask: what is the difference between these two options? Considering you decided to put in a larger down payment, chances are, you will pay your mortgage at a much lower price and you do not need mortgage insurance at the 20 percent mark. Larger down payments can provide you cashflow if that is what you like.

We'll also assume that the appreciation is 6% for both the $100K & $200K homes. (In reality the appreciation rate could very well be different for each if located in different markets or if property types vary, like a single family home vs. a duplex. We'll ignore these differences for this article). That means after one year of appreciation the $100K home will now be worth $106,000, while the $200K home will now be worth $212,000.

You will have made double the amount of appreciation with the 10% down payment on $200K option, but you didn't have to spend one penny more! This effect will compound year after year and after awhile the difference will staggering.

In no time at all, savvy investors like you will have enough to get you some equity and you can eventually purchase another property. The MORE properties you have working for you, the better the effects of appreciation will be. What are you waiting for? There will be some limitations in paying a lower percentage down payment though such as additional maintenance costs. But those are minor issues if you compare it to the long-term benefits it promises.

In addition, cashflow is taxable but debt payments and maintenance costs are tax deductions so again you're getting an advantage by using more leverage (more OPM) and getting less monthly cashflow. Some people need the monthly cashflow, and if so, one can shift his strategy to accomplish just that. Many others will find that giving up the extra cash every month means huge long-term wealth building advantages.

With these in mind, its not surprising that you chose the better one. Start pooling your team of experts now and make the right choice!

Alexandria P. Anderson is a licensed Minnesota Realtor that helps people to find and purchase real estate in the Twin Cities and other Twin Cities property depending her clients' needs.