Many real estate investors use the term leverage. In the simplest terms, leverage means the Investor is using his Investment money in such a way as to derive the highest profit possible. Many real estate investors use the following axiom to obtain maximum leverage: Purchase as much real estate value with as little cash investment as possible. The reason for this  rule  of  thumb  is  that  property  values  will  increase  or  appreciate  at  the  same  rate regardless of how much down payment money is invested. For example, let's say we buy a $100,000 house for investment purposes and we put $20,000 down. If the house appreciates 5% or $5,000 during the year, you have made a $5,000 gain on a $20,000 investment. A 25% return on your money! Not too bad. On the other hand, if we could purchase the same house with 5% down ($5,000) and the house appreciated $5,000 during the year you would have a 100% return on your investment! You also would have $15,000 in available cash to purchase three more such homes with 5% down! Maximizing the leverage.

The following example of refinancing to gain leverage is an actual situation that occurred in
1978: Mr. Holt owned and lived in a home valued at $100,000. He had a conventional loan on the property of  $18,000. He was in a 60% tax bracket at the time. Mr. Holt wanted to
accomplish several objectives by refinancing his home. (1) He wanted to provide himself with  more  tax  shelters  to  protect  his  $60,000+  per  year  salary.  (2)  He  wanted  to
purchase some investment property that would increase his overall financial status and
provide additional tax write-offs. (3) He wanted maximum leverage on the home he occupied. (4) He needed cash to purchase a $400,000 apartment building.

Mr. Holt found out that he could refinance the home he was living in from an $18,000 conventional loan to a $100,000 VA loan. The VA lender would payoff his conventional loan and give him a check at closing for $82,000-less the cost of refinancing. While Mr. Holt had to pay approximately $4,000 for closing costs and points to refinance, he ended up with $78,000 cash, which was adequate for a down payment on the apartment  building. (Caution: many lenders do not allow refinances to obtain proceeds.)

Mr. Holt purchased the apartment complex worth $400.000 and proceeded to rent out the units. The total rents collected roughly equaled the payments on the building. So Mr. Holt had no profits from the cash flow or rent. but he gained valuable tax write-offs. He was allowed to depreciate the value of the structure. The building was worth $400,000 but about 20% of the value was for the land which cannot be depreciated. Hence, he could depreciate $320,000 + a 40 year useful life (271!2 years today). This gave him an $8,000 yearly write-off, worth about $4,800 in reduced income taxes to Mr. Holt each year! In addition, the property appreciated an average of 8% per year for the next 10 years. This gave Mr. Holt a paper profit of $32,000 per  year  for  appreciation.  He  also  received  additional  interest  and  tax  write-offs  on  his personal residence as his house payment went from $250 per month to $1000 per month after refinancing. He received interest and tax write-offs for the apartment complex but they were offset by the rents collected.

The cost of refinancing Mr. Holt's mortgage was a one-time charge of $4,000. In addition, when he refinanced his $18,000 conventional loan to a $100,000 VA loan, his payments went from $250 per month to  $1000 per month. While not everyone could afford an increase in payments of $750 per month, Mr. Holt could afford that increase, because he was paying a much lower payment than he might have been paying on a $100,000 house and he was in a
60% tax bracket, which meant 60% of the increased payment was tax deductible! Hence, Mr.

Holt's tax breaks on the new monthly payment amounted to about $450/month. After taxes are considered Mr.  Holts additional net cost was approximately $300 more per month or about $3,600 per year. Mr. Holt achieved the following objectives by refinancing his mortgage to gain leverage:  ( 1) He increased his tax shelters by $8,000 for depreciation on the apartment complex. (2) He increased his tax shelters on his residence by about $8,000.
(3) He Increased his total real estate owned from $100,000 to $500,000. ( 4) He was able to achieve maximum leverage on his residence by obtaining a $100,000 mortgage on a
$100,000 property. (5) He increased his investment income by $32,000 per year in appreciation.  (6)  He made his home more marketable for resale as he had  a fully
assumable loan of $100,000 on the $100,000 house. His house could have been sold for nothing down, no quality- lying, no closing costs-just take over the payments. (7) While his income was increased his  federal taxes had decreased. (8) Mr. Holt's yearly gain was conservatively estimated at $32,000 for appreciation plus $4,800 tax savings for the depreciation benefit. A total of $36,800 returned at a cost of $3,600 per year after taxes! A 1,000% return on investment! That is leverage!