Property Leverage – Why it is Important – Logic Partners
The concept of a property investment portfolio often revolves around something we call property leverage. In the property world, the term leverage simply refers to the borrowing of finances to increase potential return. Rather than coming up with the cash needed to invest in property after property, investors use the equity generated by the rising value of one of their existing investments to purchase a new one. This process can be repeated over and over again as the equity rises on each property. Of course, leveraging real estate to build wealth does rely on the value of the property growing and the size of the mortgage reducing or staying the same.
At Logic Partners we coach and mentor our clients to begin their investment portfolio and grow it. This avoids any regrets further down the line, replacing that with a sense of relief and accomplishment that they made a decision that will have a positive impact on their future.
Leveraging in real estate –
Real estate is one of the very best industries in terms of leveraging opportunities. You can take $50,000 in cash and transform it into $500,000 worth of assets. Diversifying and building out your portfolio can result in some incredible investment returns, and leveraging property is one of the best vehicles towards this success. Across Australia, the average property investment doubles within ten years. Of course, not every investment will see this kind of return, but the average figures represent a 100% increase over a decade. Over the past 25 years, the national average growth rate has been 6.8% per annum.
Two examples of successful leveraging –
Let’s say that you bought a house for exactly $500,000, paying 20% as a deposit ($100,000) before borrowing the remaining $400,000 via a mortgage loan. Let’s also say that over a period of five years, the house goes up in price by $100,000. This would mean that the original mortgage loan, which was once 80% of the property value, would now be just 67%. This value would drop even lower if you had been paying off your mortgage in those five years. You would then have the chance to refinance your loan to increase it backup to the original 80%, which in this case would now be $480,000. This means that you have created a cash pool of $80,000 to be used as an investment in a new property. And the cycle continues.
Taking a real-life example that we witnessed in Australia, a client invested $35,000 in cash to secure a $390,000 property. Using the average of 6.8% growth rate per annum across the country, that client would have seen their property grow by $26,520. That represents a 75% return on his original cash investment in the space of just 12 months. That is the power of leverage real estate. You need to invest, then wait… not wait to invest.
The benefits to leverage property –
Using leverage home equity in the above way, you reduce the need for cash reserves. This means that you need not risk your cash, instead using the freed-up pool to invest in further properties/rental investment. Saving up $80,000 from scratch to invest in a new property would usually take a good while to achieve. Property values often increase at a far faster rate than you are able to physically save your cash, making property leverage a far more efficient and risk-free option. It also allows you to buy an investment property today, rather than having to wait years to save up. Therefore, you reap the rewards of all future growth.
The importance of a mortgage broker –
Planning is an essential step to take before refinancing and using cash pools to reinvest in new properties. You need to know exactly how you are going to set out your finances, be confident that you have the equity needed to cover deposits, and be able to afford things such as stamp duty, agent fees, and more. A mortgage broker is an essential figure to have in your corner during this progress, as they have years of experience and knowledge behind each one of their decisions. At Logic Partners, we have a team of expert brokers who can guide you through every step of the way. It can often be a good idea to set up individual loan splits against the first investment property, as this will then be used to invest in further properties in the future. As long as these splits are used for investments, they can often be tax-deductible. We also recommend that you set these splits up as lines of credit over a mortgage, as you don’t end up paying for what you do not use.
Logic Partners –
Don’t just take our word for it though, browse the website today and have a look at some of our client testimonials to see what other real-life investors thought of our process. If you are suitably impressed, then submit an enquiry and we look forward to hearing from you soon.