Traditionally, real estate investors have used leverage (other people’s money) to pyramid a small amount of capital. If, for example, you had $100,000 and bought one piece that went up 5 percent in the next year, you’d make $5,000 in appreciation. To use leverage, you find ten such parcels, putting $10,000 down on each and taking out $90,000 mortgages. If they went up 5 percent, you’d have appreciation totaling $50,000 in the same one year—and you’d control a million dollars’ worth of real estate. This traditional technique runs into problems, however, when local conditions change, employment drops, and it becomes difficult to find tenants who will pay enough to cover those ten mortgage payments. You may end up supporting the real estate by taking money out of your pocket each month—if you have enough money in your pocket. This is the vacancy factor referred to earlier. Those cheery investors who give testimonials on cable TV may say, “Within a week I owned a million dollars’ worth of real estate,” but a more accurate statement would be, “Within a week I owed on a million dollars’ worth of real estate.” |
