can someone explain leverage to me as practised by those RE bullshitters finfluencers. I feel their whole spiel is just bullshit but I don’t know enough to be sure about it.
according to them, you “buy” a home - you put X% down and pay your first monthly (and then post on r/firsttimehomebuyer). then you go to (another?) bank and say “look I got this house I wanna use as collateral” and they go “wow you own a house! sure, have this bag of money”… repeat until you “own” like a city block.
like, how does that not crash and burn at the first step, just a cursory glance at the asset’s status? how are they not “lol you ain’t got no house dumbass come back in 20 years when you actually own it”?
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You can’t use house #1 as the collateral for both the mortgage on house #1 and house #2, because the bank is smart enough to know that you don’t actually own house #1. If house #1 has appreciated significantly from the purchase price, or you have paid off a good chunk of the mortgage, you may have enough equity to take a loan (eg home equity line of credit / HELOC) on that equity to get down-payment money for a second house. That’s generally a slow process, unless you happen to own property in a market bubble.
how does that not crash and burn
It does. A lot of people try to get into leveraged investing and end up in bankruptcy. What you’re seeing from finfluencers is selection bias: either they’re one of the few who didn’t crash and burn (largely luck) or they’re lying.
A lot of real estate leverage strategies go after other loan options after banks stop giving them mortgages. That means hard money lending, angel investing, etc, where you’re taking on high loan rates and giving up equity in a business in other to try to generate enough cash flow to outrun the payments. If everything works perfectly, you can stabilize and pay off the higher interest loans. But if you have any issues (higher than expected vacancy rates, needed repairs, etc), you absolutely can crash and burn.
The best option imo is to house hack. Here’s a leveraged strategy with far less risk than those finfluencers, but still quite risky and hinges on you doing a lot of work:
- buy a multi-unit property, live in one of the units, and rent the rest - you get primary residence rates, and you can move out in a couple years
- repeat step 1 on a new property
- sell property 1 after 2-ish years of moving out to get the maximum tax benefits
- buy an investment property or two with proceeds from 3
- repeat until you’re tired of living in multi-unit properties
Congratulations, you now own multiple multi-unit properties all with mortgages you can actually afford because your risk is diversified across several properties and your loan rates are relatively low.
However, you’ll need decent income to do steps 1&2 to qualify for the mortgages, and you’ll need to spend a lot of time dealing with tenants, so you’ll basically be working two high stress jobs.
This is still incredibly leveraged, but you’re reducing risk a bit by being physically present and thus can react to problems more quickly. It’s not for me, since I much prefer passive investing (stocks) to real estate leveraged strategies, but some people see success with it.