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Let's Talk Leverage

When throwing around housing prices, appreciation percentages, down payments, mortgage payments, and the like, you end up with a lot of big numbers. It's easy to look at a home appreciating 10% in a year (a reasonable number in many parts of the San Francisco Bay Area) and be astounded that in a year you can earn $80,000*.

But let's take a closer look because you didn't just earn 10%; if you put 20% down, you earned not 10%, but 50% return on your investment. Yes, you read that correctly: 50% ROI. To understand how this works, you need to understand leverage.

Leverage, in the most simplistic terms, means that you are using something to its maximum advantage. Keep in mind I'm going to stick to easy, broad numbers for the sake of simplicity but you can really drill down to the pennies, interest rates, and total expenses incurred if you so choose (and for true accuracy to your situation, you may want to do that -- and ask your financial professional for help).


Purchase price in 2015: $800,000

Downpayment (20%): ($160,000)

Home value 2016: $880,000

Increase in value: $80,000 (10%)

Output (downpayment): $160,000

Earnings (appreciation): $ 80,000

Return on initial investment: 50% ($80,000/$160,000)

If you put down less money you are more highly leveraged and your return can be even greater on a percentage basis:


Purchase price 2015: $800,000

Downpayment (10%): $80,000

Home value in 2016: $880,000

Increase in value: $80,000 (10%)

Output (downpayment): $80,000

Earnings (appreciation): $80,000

Return on initial investment: 100% - Doubled your initial investment

Wow! Where else can you have the potential to earn such amazing returns on your capital these days? I know, it's pretty impressive. Still, I would be remiss to not warn of the flip side of being highly leveraged which is that should the market experience a correction you may not have the cushion of equity that comes with a larger initial output (downpayment) to stay in the black with your head above water.

Everyone's situation is different. Ask yourself questions to determine what strategy is best for your longterm (or short term) goals. Is owning real estate part of your investment strategy, or is the investment in homeownership less of a consideration than buying your family a home? Are you considering selling and wondering if you've held your property long enough to realize your desired return? What will you do with the proceeds when you sell your home? What do you risk losing if you wait to take the first step? What can you gain by taking that first step today instead of tomorrow? Call or email me today if you're ready to take that first step.

*Please note all the numbers used were pulled out of thin air for the sake of the examples and offer no guaran