Not every investor has the means to pay for a property upfront. Fortunately, there are several ways to finance a real estate investment – one way is through real estate leverage. In this article, we’ll go over the basics of real estate leverage, including why it works, how to get leveraged real estate, and what drawbacks to be on the lookout for.
What is Real Estate Leverage?
“Leverage” sounds like real estate lingo, but it’s not as complicated as it sounds. Real estate leverage is when you buy a property with borrowed money. By leveraging another person’s money, you’ll be able to buy a property without paying for the whole cost with your own money. It is generally done through real estate mortgages, but it can also be done through other forms of financing.
As a real estate strategy, it involves putting down your own money to pay for 20% of the purchase price and getting a mortgage to pay for the 80%. In that way, you can purchase properties that you otherwise wouldn’t be able to afford with your own savings.
It’s worth mentioning that banks will want you to make the monthly payments on time, and with interest. Therefore, it is crucial to find a property that can generate a greater rental income – one that can cover all your costs. By partnering with a property management company, you’ll be able to get the guidance you need to choose which properties are “investment-worthy”.
What Are the Benefits of Real Estate Leverage?
One of the advantages of the leveraging strategy is that can now purchase properties that you can’t afford on your own. As of writing, the average price of properties in the U.S. is $374,900 – if you had to pay for that upfront, only the wealthy would be able to buy real estate! Below, we’ve broken down the benefits of buying real estate with borrowed funds:
Your Property Pays For Itself
When you get a mortgage to purchase a property, you can count on the rental income to pay for the monthly payments. Let’s say your monthly payment amounts to $700 – that can absolutely be covered by the rent you collect. The downside is that your rental income will now be lower, but a low cash flow is better than no cash flow!
Be sure to partner with a South Florida property management firm that can crunch your numbers. That way, you can make sure you actually put your money into a money-making property.
Expand Your Real Estate Portfolio
By borrowing the bank’s money to buy a real estate investment, you’ll be able to make more money. Let’s put it this way – if you were to purchase one property, your net income after a year would be about $15,000.
However, if you were to buy five properties, you can expect to make more money, even if you have more monthly payments to make. Even if your net income on one property amounts to a mere $5,000, if you multiply that by five, that’s still $25,000 – way more than what you’d make with one real estate investment.
What’s more, you’ll have multiple properties that appreciate at the same time. You can raise your rent, and in turn, earn more yearly.
What Are the Types of Real Estate Leverage?
You can borrow money to buy real estate from different sources, such as:
Mortgages are the most common way to get leveraged real estate – in fact, it is estimated that 42% of Americans have a mortgage. Mortgage terms range from 15 to 30 years, and can be obtained from financial institutions. There’s a wide range of mortgages you can get, such as conventional mortgages, fixed-rate mortgages, etc., however, if you’re a first-time homeowner, it would be advisable to go for an FHA mortgage.
Home Equity Line of Credit (HELOC)
This works for people who already own properties. With HELOC, you can purchase a property with your current property as collateral.
Home Equity Loans
This also works for people with properties. Also known as a “second mortgage”, you’ll get a fixed amount that you’ll have to repay over a predetermined period of time.
If you don’t want to borrow money from the bank, you can get a mortgage from a portfolio lender. They are also financial institutions, but they don’t follow the strict guidelines that a bank would follow. With that said, they’re more likely to charge greater interest rates as there’s more risk.
When you obtain a private loan, you borrow money from people or business partners who have the means to back you up. You could even borrow money from a fellow real estate investor – that is if you have connections! If you get leveraged real estate this way, create a professional contract to ensure that each party’s obligations are clear. A property management professional can help you prepare this fool-proof contract to protect you in case of future misunderstandings.
What Are the Risks of Real Estate Leverage?
Even if you get leveraged real estate, there is no guarantee that it will generate the income you need to make your monthly payments. What if you have to lower the rental rates? What if you can’t fill your vacancies fast? Unfortunately, if you can’t make your monthly payments, the bank could foreclose your property.
That’s precisely why you should study the market. With the help of a property management firm, you can identify the markets that are “safer” than others – these are markets where the rent is expected to grow, not the other way around.
Leveraging Real Estate? Make Sure to Manage Your Property Well
To avoid the risk of losing your property, partner with a property management company like Luxury Property Care. Through our expert property management services, we’ll make sure that you can make your monthly payments each time. We also provide investment services to help you decide how to finance your future properties.