SF Peninsula Real Estate Guru

Chris Smith, Real Estate Investing in the Real World in a recent post indicates that when a real estate investment starts to produce a good cash flow, it may be a good time to sell/exchange that property in order to increase the leverage on your invested dollars to maximize return.

Here is how the concept of leverage works in real estate investments including a primary residence.

 If you buy a home about put 20% cash down into the property and the property appreciates 5% in a year; your actual return on the cash down payment is 25%.

For example, let’s say a $100,000 property purchased with 20% or $20,000 down.

If property appreciates 5% or $5,000 in a year; your equity increases from $20,000 to $25,000 - that’s a $5,000 return on $20,000 or 25% per annum.

If you bought the same property and put 40% or $40,000 down - you would get a $5,000 return on a $40,000 investment or 12.5%.

Of course, one needs to look at cash flow. I will run the numbers and try to account for the effect of cash flow on the investment returns and report back.