Leverage

Leverage, as it relates to real estate investments, is a technique that allows an individual to control a valuable asset with far less money than the underlying value of the asset. It is most often used by real estate investors who buy and sell houses for a living. As an example, you could buy a house for all cash and have zero leverage, or you can buy a house with 10 percent down and have quite a bit of leverage. Leverage increases your potential for a greater return on your investment, but it also magnifies risk. The amount of money you put down is considered your investment. If you put $5,000 down on a $100,000 home and sell it for a $5,000 profit, you will realize a 100 percent return on your investment. Conversely, if the house goes down in value and you sell for a $5,000 loss, you have suffered a 100 percent loss on your investment.