Should you use leverage to grow your wealth? Is it risky or worthwhile unlocking equity that’s in your property? Learn the optimal conditions for using leverage.
Using Leverage to Grow Your Wealth
If you’re unfamiliar with the concept of leverage, it might seem a bit intimidating at first. But it’s not only a great way to increase your assets, leverage is also a great tool to have in your back pocket next time you’re investing in real estate.
Here’s what you need to know about using leverage to grow your wealth.
What is Leverage?
To boil it down to a basic definition, you create leverage when you use borrowed money as an investment funding source. What this means is that you can grow your assets faster and get a good ROI even though the money you’re investing isn’t yours. Investors use leverage because the higher your return on the property, the more you ultimately profit.
How to Use a Mortgage as Borrowed Capital When Investing
It’s possible to use a blanket loan to purchase multiple investment properties. This can allow you to split your investment and lower risk while increasing your chances of seeing gain. An example is buying two $100,000 properties with $50,000 in starting capital and using financing to cover the remaining balance. This would give you %75 leverage and would allow you to see large gains even though you only started with $50,000 of your own capital.
Regardless of whether you want to buy one property or several, leverage could work for you, especially if you’re investing in properties to flip them. But each situation will produce a slightly different result.
Optimal Conditions For Using Leverage
The most ideal situation to use leverage would be the above example. If the properties increase by, say, 6 percent, then you’d gain these just because the market went up even if you don’t do anything else to the house in terms of repairs or maintenance. This is why leverage is often referred to as making money on other people’s money.
Basically, leveraging works best when the market is good, which means you have to understand if values are tapering off before you take the plunge. If the market isn’t what you expected you may find yourself needing to sell your property fast.
Potential Risks of Leverage
It’s pretty easy to get carried away when you’re profiting off loans. You have to remember that it’s not a get-rich-quick scheme, and it’s not a bad thing to be in it for the long haul. If you don’t have reasonable expectations of how property values can increase (or you didn’t read the market correctly!), you may invest too much money and not get the ROI you were hoping for. In fact, in a bad market, you could easily lose money. Remember, don’t buy a house that’s so costly you can’t pay the bills and, if tenants will be living in the home, make sure the rent will cover the expenses.
Gains and Incentives of Leverage
They say you have to have money to make money, but with leverage, that’s only half true when you don’t have to have all the capital to make the investment. When you leverage properly, you can increase your net worth, acquire amazing investment properties, make money off the rent your tenants pay you, and increase your cash flow so next time you invest you can do so more independently.