What does "financial leverage" refer to in real estate investing?

Financial leverage in real estate investing refers to the use of borrowed capital to finance the purchase of a property, thereby increasing the potential return on investment. By using loans, investors can acquire larger assets with a smaller amount of their own capital. This strategy allows them to amplify their gains, as any increase in property value represents a more significant increase in their equity compared to if they had used only their cash.

For example, if an investor uses a loan to buy a property worth $1 million with a $200,000 down payment, any increase in the property’s value benefits the equity based on the total property value, not just the cash invested. If the property's value rises to $1.2 million, the investor's equity increases significantly, demonstrating how financial leverage can enhance returns.

This concept is a fundamental part of real estate investing because it allows investors to maximize their opportunities without necessarily having to use all their personal funds for the acquisition. Understanding financial leverage is crucial for making informed investment decisions and effectively managing risk in real estate.