When money is borrowed to purchase an investment, it’s known as leverage. Almost all home owners and investors use leverage to purchase property in the form of a home loan
Leverage is one of the key strategies used by investors to make money. Consider two investors who each have $100,000 in savings to invest. One investor purchases a $100,000 property wholly with savings (where can you find a property for $100,00? who knows but bear with me), while the other uses the $100,000 as a 20 per cent deposit to purchase a $500,000 property, with the remaining $400,000 balance paid for with a loan from a bank.
If both properties increase in value at the same rate, the investor who uses leverage has increased their wealth significantly more. If property values rose by 10 per cent, the first investor could refinance their property for $110,000, while the second investor could refinance theirs for $550,000. One has realised a $10,000 uplift (or 10% of their starting $100,000), while the other has realised a $50,000 gain (or 50% of their starting $100,000). This would allow the leveraged investor to possibly use their $50,000 equity gain to look at buying another property at $250,000 and start a snowball effect on their wealth creation.
Whats the downside?
Leverage is not without its risks. While leverage magnifies capital growth, it can also amplify any losses if property values fall and the investor is forced to sell. In the same scenario as above, if property values fell 10 per cent, the investor who uses leverage would be down $50,000, while the investor who used just savings would only be down $10,000.
Luke Jorgensen - Lush Property
Tags - Property Investment; Property Development; Renovation; Valuation; Valuer; First Home Buyer; Buyers Agent; Buyers Advocacy