Investing in real estate is always a great way to build long term wealth while diversifying your portfolio, however a common hurdle for most first-time investors is the lack of funds. It’s no surprise that real estate is a capital intensive route to take, which is why real estate leverage can help alleviate the stress of thinking you have to buy income property strictly with cash. Being smart about magnifying your returns through leveraging can be the difference maker between expanding your portfolio and hitting an investment wall.
What does it mean to leverage real estate?
If a new investor doesn’t have the capital to purchase property, their quickest and most viable option to proceed with the purchase is to borrow it. In short? You, as an investor, would use other people’s money to not only multiply your buying power in the market, but also increase your return on investment. This is where a lender comes into the picture.
Using a lender to finance your investment project – whether your first or your tenth – is often the most secure way to develop and diversify your portfolio. Typically, the less cash you use to invest, the higher your leverage and return on investment.
What are the benefits to leveraging real estate?
It builds equity – This is particularly true with properties that will become rentals. When a property is first purchased, your equity is limited to the amount of cash you initially put into the deal. However, with rentals, that ongoing income pays down the principal on the loan you acquired, and you’ll be building equity essentially paid for by tenants.
Tax benefits – Tax deductions are a huge benefit to leveraging your real estate purchases. Not only will you still have the benefit of depreciating the total cost of the property – not just the cash put into it– but also the ability to write off the interest paid on the loan.
More bang for your buck – Literally. Instead of buying one property every three or four years, you can buy multiple within the same year, making the most out of your cash, as well as your newly formed lender partnerships.
What are the risks and how can they be avoided?
Stable markets (or lack thereof) – Successful investment stories always begin with proper due diligence. To avoid investing in a floundering market, make sure you consider properties in cities or regions that are showing steady growth and development. Consider things like the rental market, job growth, and value trends.
Having too high a payment – A low down payment may seem like a great way to keep as much cash to yourself when picking up an investment property with a lender, however, higher leverage results in higher payments. Similarly, just because you can get a property with very little cashout lay doesn’t necessarily mean you should. As already noted, you’ll have to research the property’s value and market trends to establish whether or not what you’re eyeing is worth the effort. It will give you good insight as to whether the property is overpriced (leading to minimal appreciation).
When approached pragmatically and with all the information you need, leveraging real estate is an excellent way to build wealth and create opportunities for ongoing passive income. Knowing what to seek out, as well as what to steer clear of, can help you put your best investor foot forward. If you’re ready to discuss your next investment strategy with a qualified lender, contact Temple View today.