Buying and quickly reselling property can earn tremendous returns, thanks to what is called financial leverage. But real estate investments face commensurate risks, also due to leverage. If you have real estate investments, please consider permanent life insurance.

You capture the growth on a large asset – a house – using a much smaller asset, your down-payment. In a market increasing at 7%, a 20% down payment can produce as much as a 35% rate of return.

Here’s how: You purchase a rental property for $100,000 with 20% down. (For simplicity, let’s assume your rental income exactly covers your interest-only mortgage payments and other costs. So from a rental income and cost perspective you are at breakeven.) Now assume that your investment appreciates in value at 7%, a conservative average for California housing (using 30 years ending 1998).

At the end of one year, you will have a house worth $107,000. Therefore, your gain will be $7,000 on an investment of $20,000, or 35%. This is an enormous return. To put it in perspective, the S&P 500 averaged an 11.7% return (over the same 30-year period ending 1998). If you averaged this return each on $20,000, in nine years you would have nearly $300,000!

But using leverage is risky, because it magnifies both positive and negative returns. For example, let’s say during a market downturn your property is worth $90,000. If you were forced to sell, you would lose $10,000, or half of your $20,000 investment!

If you have money invested in properties in today’s market, you may very well be experiencing negative leverage. How would your legacy look if your heirs were forced to sell your properties now due to your death?

California real estate can be an excellent investment choice, but if you intend to hold properties throughout your retirement years, please consider permanent life insurance as a protection against the forced sale of your properties due to death.