Do you wish to increase your profits on real estate investments? Perhaps you will want to consider utilizing leverage to maximize your return. Leverage is simply using less of your money and more borrowed money. This is an excellent way to increase profitability and your percentage of return.

How does it work? Most commonly in real estate, investors borrow money on a property and commit to a mortgage as part of the money in the investment. The investor will make more money on the investment using leverage versus cash if the property appreciates.

For example, if a person purchases a home for $400,000 with cash and that home appreciates 5 percent, the profit is $20,000. If a person purchases a $400,000 home with a $100,000 down payment (and a loan of $300,000), a 5 percent profit still yields $20,000, but the buyer only had to put down $100,000 of his or her own money as opposed to the full $400,000, so the investment return is 20 percent rather than 5 percent. These investments typically are counting on the rents to pay the mortgage and other costs so the investor can hold the property indefinitely for potential appreciation.

Commonly, small investment properties will have 25 percent or more as the down payment and a 75 percent loan to value. Of course, with a higher loan payment, the risk is higher, especially if the property is vacant for any period of time. Investors should plan on having available funds for any vacancy, repairs or other costs that occur.

On a practical level, leveraging dollars oftentimes allows a larger purchase or more purchases. If a person does not have cash for a purchase, the buyer may be able to purchase a larger property based on the idea of leveraging. When leveraging dollars, a person may put down a small amount of money on several properties and thus see returns on each of them, increasing profits and diversifying the risk among more properties.

Of course, the more properties and mortgages a person owns, the more debt incurred. While mortgage debt is not altogether bad and may have some tax advantages, debt still causes higher fixed expenses. Leverage can maximize investments, and this may be a good time to consider it. The rental market has strong demand, and rents are increasing.

Meanwhile, interest rates are still near their historic bottom, allowing investors to borrow more money for a smaller mortgage payment.

When a person purchases a property with cash, the risk is very low. If the investment is in real estate, the investor is holding an asset, which has intrinsic value. And if it is producing rents, investors can hold the property indefinitely through both good markets and bad markets. The return is lower, but the risk is lower, too.

Don Ricedorff is a Realtor at The Wells Group in Durango and a past president of the Durango Area Association of Realtors. He can be reached at don@durangorealproperty.com.