House buying is highly leveraged
Real estate investments are considered solid and reliable, but, they are also highly leveraged, as an aspect most buyers disregard. Let’s do some simple math: if you make a 20 percent deposit when buying a house, you borrow 80% of the value of your house. If your property’s value decreases by 20 percent, you’re not losing 20 percent of what you’ve invested, you’re losing 100 percent.
In numbers, if you purchase a property for $100,000 put down $20,000, you’ll still have to pay $80,000, right? If its price drops by 20 percent to $80,000, you could put it up for sale to pay out the mortgage, but you’ll still lose the $20,000 that you initially invested.
In some cases, for instance, with FNMA and VA, your leverage could become even higher. It’s true that leverage can also work in your favor if your property value increases, but it’s important to understand how leverage works first.