- 8 November 2021
- Posted by: admin_gray
- Category: Property
Written by Sapphire Gray of Savvy Women Group
In this Week’s SWG blog, we discuss leverage: what is leverage, how can you use it in your business ventures and why this is a good option for a property investor? As we are focused on helping women build wealth, we want to dispel some myths including, all debt being bad debt.
There are times when taking on finance may be a suitable choice, allowing you to get more for ‘your’ money. Learn more by reading below.
WHAT IS LEVERAGE: Leverage = using debt to increase the potential return on investment.
Leverage in property is generated by using borrowed money from a loan or your partner in your business as your source of funding.
A simple example of leveraging is a mortgage: if you put down a 20% deposit, this leaves a remaining 80% in leverage.
In doing this it allows you to buy a larger priced home and will hopefully bring in a better return rate in your investment. This helps you to make money off other people’s money and should secure your future returns on your investment.
HOW CAN YOU USE LEVERAGE IN YOUR BUSINESS?
One way to gain leverage on an investment home is to buy a lower priced home all in cash, and then purchase another home with cash and use a loan to pay for the rest. You can build equity that way and a future for yourself and your family.
(Equity = the difference between what you owe [mortgage] and what your home is currently worth. If you owe £250,000 on your mortgage and your home is worth £300,000, you have £50,000 of equity in your home.)
If you keep doing this type of method, it should bring about more of a financial return for you and your investors. This method is stated to be risky, but it is worth it if it helps you to be more financially stable and provide a really great source of income for your family.
“The more leverage, the greater returns can be, but the losses can be larger as well. Leveraging your investment essentially makes the return more volatile, and if you can’t stomach the risk, don’t bother”- blueleaf
Try using someone’s ideas on leverage to see if this is a good way of making money for you and your family. We have talked risks but comparatively this method is less risk averse than the stock market for instance.
Want to watch an informative video on how and why you should leverage property? Click here
RULES TO REMEMBER WHEN USING LEVERAGE:
Just remember to only purchase homes that you can afford the payments on and do not let any payment go by without getting paid. That can negatively affect how leverage works. An idea to keep in mind is to try and find a balance between your down payment and your monthly payments.
Also take it step by step. You do not want to rush anything especially if it means that you will lose money in the end. You need to keep your investments higher than your losses. It is important to do this to ensure a successful business venture.
Keep your focus mainly on your cash flow. Keep records if you are a rental property manager to ensure that you are keeping notes on your costs. Is it worth it to keep both? If you can keep your expenses lower and able to make a profit, then leverage is a good expenditure for you to try out.
Do not always count on the equity that your house may bring you. Some homes values do not accrue as much value as others and that can be detrimental to employing leverage.
Always keep in mind that location is key when finding a good investment home to purchase. A good home in a good location will help with the sale of the house.
By now, you should have a firmer understanding on how leverage can help you grow your return on investments. To seek professional advice on starting a property business and access to our expert coaching, click here.
Visit us on our blog, where we post every Monday and download your FREE Complete Beginner’s Guide to Property Investing today.