In Real Estate investing, you have a tremendous advantage over other forms of investment. One of these advantages is the use of leverage. In financial terms, leverage is using borrowed capital (other people's money) with the expectation that the return on the investment is greater than the cost of borrowed funds.
Let's assume that you buy a $200,000 rental property. If you pay all cash and the property generates $16,000 in net income (after all expenses) your yield is 8%.
Now, let's look at the same purchase, leveraged with bank financing.
Let's assume that you borrow 80% of the $200,000 ($160,000) and you invest the remainder in cash ($40,000).
Now lets assume that the cost of borrowing the $160,000 is 6% (or $9,600 per year). The property generates the same net $16,000. You have to pay the bank $9,600 for the loan, netting $6,400 ($16,000-$9,600 = $6,400).
Although you have less cash, your yield is based on a much lower initial investment of $40,000. A $6,400 return on a $40,000 investment equates to a yield of 16%, (versus the 10% yield if you paid all cash). The reason is simply this; you are making money on the banks money as well as your own.
In today's DFW property market, yield's on rental properties are very attractive and loan costs are still very low. It is the perfect combination to utilize leverage to dramatically increase the return on your investment dollars.