Those who study physics know the power of leverage. It's possible, for instance, for one person to move a ton of weight high into the air by using pulleys and rope. It's also possible for a lumberjack to spin around a 400-pound stump like a toy top, by balancing it on top of a small branch. Those who understand real estate investment know that it's possible to use home equity leverage to acquire other properties, and even more equity. Those properties can be used to buy additional investments in a domino effect that multiplies one's nest egg with little or no out-of-pocket cash expenditure.

Profiting with a second mortgage

For example, if you own a home that you bought for $200,000, and it's now worth $275,000, it's possible to take out a 2nd mortgage on your home by borrowing against the $75,000 worth of equity. In some markets, that much money can buy a house, retail property, or choice piece of vacant land. And in almost any market, it can provide the down payment on a substantial purchase. If you have $75,000 and want to buy a house worth $200,000, you have more than enough money to make the down payment and do some significant repairs or updates. Turn around and lease or sell the house for profit, and you can pocket the difference, pay off your second mortgage loan, and be in position to do it all over again.

There's even more good news. While you're using the "invisible value" of your equity to generate a visible stream of monthly income, the equity of your first home-and others you may buy along the way-may increase, giving you a steady increase in net worth. Many of the wealthiest investors in the world began with the purchase of one property through a second mortgage, and enjoyed the process while improving their credit, fattening their portfolio, and saving for an earlier retirement.

Published on February 10, 2008