Using all cash to fund a new real estate investment may seem like the most logical way to get the highest possible profit; however, this is not usually the case. The best investors in the world understand the power of using leverage to fund their deals and are able to increase their overall earnings by taking on more properties at the same time.
For example, lets assume you can spend $200K to purchase and rehab a single property and will make a $50K profit on the house.If you use cash, you focus on one property at a time, and use the proceeds from one to buy the next investment property.
However, once you understand that with moderate leverage (75% LTC), you can split the same $200K into buying 4 houses ($50K cash down-payment each), instead of one at a time, you may quickly realize your profits will explode.
Utilizing debt will cost you a little bit, lets assume $10K, which makes your profit on each property decrease from $50K to $40K. However, because you are using the same $200K cash to buy 4 properties, instead of one, you are now making a total profit of $160K ($40K x 4 homes), rather than $50K ($50K x 1 home) – using the same amount of total invested cash.
To learn more about leverage and how to structure your deals using capital, read this blog post.