Real estate investments have been a popular option to expand your investment portfolio. Investors can constantly enjoy the benefits of their real estate investments for life. Various benefits can make rental properties worth considering as an investment for real estate owners. However, investing in a rental property isn't a straightforward road. You should always perform adequate research and consult a realtor who is familiar with real estate investing before purchasing a property.
Leverage is a tool that many investors use in real estate which is one of the financial strategies that can help you purchase multiple properties using the banks money!
What does it mean to leverage a real estate investment?
Many people don’t know how leveraging can help you in real estate. Here are some tops and information to better inform you!
What does it mean to leverage a real estate investment?
Leveraging in a real estate investment involves utilizing borrowed money to acquire properties. You can use leverage to buy a real estate property as investment and spread out your money to multiple properties.
The borrowed capital could come from a variety of sources. Typically, these sources include traditional mortgages, lines of credit, or even partnerships.
Leveraging in real estate investment allows investors to control larger assets by investing a smaller portion of their capital.
How does leveraging work with a real estate investment?
A real estate investor must first apply for a financing option to leverage. Typically, real estate investors opt for lending from a lender, for instance, a bank.
The lender will consider multiple things. For instance:
- The value of property
- Potential rental income that the property can produce.
- The personal financial position of the investor.
All these factors can help the lender decide whether to lend the money to a prospective real estate investor.
Example of how leveraging works
For example, if an investor has $100,000 but wants to buy a property worth $500,000. The investor could secure a mortgage for $400,000, using their $100,000 as a down payment. If the property appreciates by 5%, the gain for investors would be $25,000 with this leverage. During this time the property will be rented to a tenant who will pay rent to the investor. The investor will use a portion of the rent to pay the mortgage payments, insurance, taxes and other related fees. Once all these expenses are paid the investor is left with the profits. If you take your yearly profits and divide it by the downpayment you will get your return on investment. A good return on an investment property is currently around 6%. This number can change depending on current market conditions and can continue to rise as the market strengthens.
This showcases the power of leverage in real estate investment, as the return on the invested capital is significantly amplified.
Benefits of leverage in real estate investment.
Here are some of the most amazing benefits of leveraging in real estate investments:
1. Grow your portfolio quicker.
One of the most compelling advantages of leverage is its potential to accelerate portfolio growth. Investors can diversify their holdings and spread risk using borrowed funds to acquire multiple properties.
This strategy can be particularly advantageous in real estate markets where properties value increases over time. Leveraging allows investors to enter the market sooner instead of waiting to save enough capital to buy additional properties outright. Consequently, they can capitalize on appreciation across multiple assets instead of waiting years to buy real estate.
2. Earn more rental income.
Leverage enables investors to acquire more properties. Consequently, it will, in turn, increases their potential rental income. This strategy can increase overall cash flow, creating a more substantial and reliable income source.
As rental income flows in, you can also use it to cover mortgage payments and other expenses.
3. Better protection against inflation
Historically, real estate has been serving as a barrier against inflation. Property values and rental income tend to rise as a result of high inflation rates.
As inflation drives up the cost of living, the value of the borrowed money remains constant. It will effectively help in reducing the real burden of debt over time.
4. You can get more from less investment.
Leverage essentially allows investors to amplify their potential returns. Investors can use other people's money to finance a significant portion of their investments. This means that investors can allocate a smaller portion of their capital.
They will do this while potentially reaping higher returns on the overall investment. This efficiency not only makes real estate investment more accessible to various investors. It will also increase the potential for significant profits.
Risks to avoid when leveraging your real estate investments
Here are some risks that you must avoid when leveraging in real estate:
1. Counting on high appreciation levels
While leveraging can amplify gains, it can also magnify losses if property values decline. Relying solely on property appreciation to cover leverage costs can be a dangerous bet. As real estate markets can be unpredictable, investors should have a well-rounded strategy to account for potential downturns.
2. Making a too-high payment
Overleveraging, or borrowing too much relative to the property's potential income, can lead to financial strain. If the property's rental income isn't sufficient to cover mortgage payments, property management fees, maintenance costs, and other expenses, investors could face negative cash flow.
This situation risks the profitability of investment and puts the investor at risk of defaulting on loans.
3. Not considering the cash flow.
Successful real estate investment involves comprehensively analyzing potential rental income and expenses.
Ignoring ongoing expenses like property taxes, insurance, maintenance, property management, and vacancies can affect the benefits of leverage. Investors must have a solid understanding of the local rental market when analyzing the property's potential rental income. In addition, they must have a realistic projection of income and costs to ensure their investments remain financially viable.
Final Thoughts
Leveraging in real estate can be a great tool when used accurately. Real estate leveraging has the potential to accelerate portfolio growth, amplify returns, and provide protection against inflation. However, you must approach leverage in real estate investment with careful consideration of the associated risks.
A balanced approach, grounded in thorough market research and financial analysis, can benefit you in the long run.
