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Understanding Equity Leverage
What Is Equity Leverage?
Real estate investment has long been regarded as a relatively safe instrument compared to the volatile commodity and stock markets. In particular, the Ottawa real estate market is supported by a large federal government workforce and has seen steady annual equity increases of over 3%. Knowing where, when, and how to buy- making money with other people’s money. This is the concept of equity leverage. When buying an investment property, putting a higher down payment is not always the best choice. A lower down payment might generate a greater rate of return.
The following example illustrates this concept:
Assume a $300,000 house with rental income of $1600 a month.
Option A: With 20% down payment ($60,000), 3% interest, and 25 years amortization, monthly mortgage will be about $1,140. Monthly net income will be $460 and the annual net income will be $5,520 with a cash-flow return on investment of 9.2% ($5,520/$60,000)
Option B: With a 5% down payment ($15,500), 3% interest, 25 years amortization, and CMHC insurance, monthly mortgage will be about $1400. Monthly net income will be $200 and the annual net income will only be about $2,400. But cash-flow return on investment will be over 15% ($2,400/$15,500).
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