When we talk about property investment, we will often come across the word “leveraging”. It is known that leveraging is one of the most effective ways to expand your real estate portfolio and increase your profit. So what exactly does this word mean?
In real estate investment, leveraging is the practice of buying a property using borrowed capital, typically from a lender, rather than paying for it totally out of one’s own cash. A specific portion of the purchase price will be covered by the borrowed amount, with the investor paying the remaining amount by cash.
One of the reasons this investment class is so enticing is the availability of borrowing money to purchase real estate for rental purposes and getting passive income that can cover the loan interest. Investors can also divide their wealth across a number of properties or they can buy a property that costs more than their available funds.
So how does leveraging work? To leverage a property an investor will need to apply for financing from a bank/lender. A lender will consider these 3 factors before loaning:
• Value of the property
• Estimated rental income that can be generated
• Investors personal financial situation
After considering the above, they will then decide whether to loan or not, the amount of the purchase price they will loan and the terms on which they will do it. When buying a New Zealand property, you may borrow up to 70% of the property purchase price, meaning the investor will need to cover 30% with their own capital.
What are the benefits of leveraging?
• Potential for the gain in capital invested because the investor will receive the capital appreciation on the entire worth of the property, more than just the capital they invested initially.
• Ability to distribute their capital much more extensively than if they were to just pay everything in cash for a property. This also enhances their return on investment.
By making only well-informed investment decisions, you will avoid taking unnecessary risks, and you will be able to remain financially secure even during challenging times. It is indeed possible to leverage on your property to buy more properties and scale your portfolio. If you are interested in exploring further and growing your wealth, connect with us and talk to one of our Client Consultant now.