__Real Estate - Leverage__

Leverage is the use of borrowed money to increase your profits in an investment.

Building wealth via real estate requires the use of leverage. Let's assume you have

$100,000 to invest and you purchase a small income property for $100,000. Income

properties have been appreciating at an average of 7% per year. At the end of the

first year of operation, your property is worth $107,000. At the end of year two, it

is worth $114,490. Now let's assume that you put your $100,000 down on a $500,000

income property. At the end of the first year, it is worth $535,000. At the end of

the second year, it is worth $572,450. By using leverage or borrowed money to

purchase a larger income property, you have increased your profit by $57,960 in

just two years. To get the full advantage of leverage, put the minimum down on a

good property which has a strong likelihood of appreciating in value. Stay away from

questionable properties in run down areas.

When you purchase a piece of real estate, you make use of leverage when you

borrow money towards the purchase price. The principal of leverage can be

demonstrated very easily with an investment model.

Loan Points / Loan Origination Fees / Discount Fees

Loan points are also known as loan origination fees and loan discounts.

Loan Points are a fee charged to a borrower by lending institutions for the

privilege of obtaining a loan. Lending institutions use loan origination fees

to generate income via lending activities. Each point is equivalent to one

percent of the amount borrowed. Loan origination fees are usually paid up front

in cash when you obtain a loan or mortgage. As a borrower, you should shop

around to obtain the best deal, that is, the lowest interest rate with the least

number of loan points. If you do not wish to pay upfront points, you can often

obtain a loan with no loan origination fees.

The following factors can affect the number of points paid on a loan. During

periods of time when there is a large demand for loans, lenders may increase

the number of points paid to obtain a loan or mortgage. The amount of risk

associated with the loan is another factor. Generally, the greater the risk to

the lender, the larger the loan origination fees and the higher the loan interest

rate.

Loan points paid to purchase a home are deductible. If you are refinancing a

home, the loan origination fees must be deducted over the term of the mortgage.

For income properties, you must deduct points over the term of the mortgage also.

For example, you obtain a 20 year mortgage for $100,000 and pay 1 point. To

obtain the loan, you are required to pay 1 point or $1,000 up front. You are

allowed to deduct 1/20th of this amount each year or $50. If you pay off the

balance of the mortgage early, you can deduct all unused points in that year. Check

with your finacial advisor, tax preparer or CPA

**Tien and Jim**

*Your Real Estate Partners*