Why Real Estate Investors Leverage Their Investments

Why do real estate investors leverage their investment properties?  The most obvious answer is that the more they leverage, the more properties they can purchase.  If purchased correctly, each property should generate positive cash flow.  Not only do the investors get more monthly cash flow with more properties, but they also have more renters paying down more mortgages creating more equity. 

Another reason investors leverage their money is because of the Return on Equity (ROE).  The ROE is calculated by dividing the total annual return by the equity. As you can see in the chart below, your ROE goes down as your equity goes up.  This is why some investors choose to pull their equity out of existing investments and use them to obtain new investments. 

One word of caution: the more you leverage, the more you risk.  Some investors choose to pay their mortgage off and simply receive returns on through cash flow.  

Chart is from The Millionaire Real Estate Investor