Leverage With Real Estate Investing

If you want to be a real estate pro, you should understand how real estate leverage works. Using leveraged real estate can help you grow your property portfolio faster and earn more money from rentals in an ideal world. However, there are risks associated with real estate leverage, which we will discuss later in this blog.

Let’s look at what it means to leverage real estate, the various types of real estate leverage, and the advantages and disadvantages of incorporating leveraged real estate into your investment strategy.

In essence, real estate leverage is simply a term for purchasing properties with borrowed funds. You can own the property without paying the full price right away by using leverage. (This would normally require you to save hundreds of thousands of dollars.)

Different Types Of Real Estate Leverages

When we discuss the various types of real estate leverage, we are really just answering the question, "Where do you borrow the money?" Different loan sources have different eligibility requirements, terms, risks, and so on. 

1. Mortgages

A mortgage as defined by Oxford Dictionary is a legal agreement by which a bank, building society, etc. lends money at interest in exchange for taking the title of the debtor's property, with the condition that the conveyance of title becomes void upon the payment of the debt.

Traditional mortgages are probably the most common type of leveraged real estate because they are used by nearly every homeowner.

Mortgage loans are available from a variety of financial institutions, ranging from banks to credit unions to online mortgage lenders. Most mortgages have terms of 15, 20, or 30 years.

2. Personal loans

Do you have good connections with people who are willing and able to financially support you? You have the option of arranging a private loan with them. It could be a friend, family member, professional connection, or another real estate investor, among other things. As a homeowner, if you choose to buy leveraged real estate this way, make sure to have an attorney or title company draft a professional loan contract. There will also be a full closing at the attorney or title company’s office.  Consider all of the possible consequences. Mixing money and family (or friendship) can be difficult, especially if you are in financial difficulty.

Check out these rules for lending money to family and friends before entering into a private loan arrangement with a personal connection. (However, in this case, you would be the borrower!)

3. Credit Lines For Businesses

Many real estate investors choose to finance their properties with business credit. If you already have a successful business, look into what lines of credit and loans are available to you. You can also start your own real estate investment company and purchase investment properties that way.

However, if you don't already have a profitable business, you won't be able to use this method until you've established a solid business credit score and history. It might be something you want to consider in the future.

Benefits Of Using Leverage For Real Estate Investing

1. Protect Yourself From Inflation

During periods of high inflation, the purchasing power of your dollars decreases steadily. As a result, the prices of goods and services rise, and you lose purchasing power. You may notice inflation when your grocery bill rises despite purchasing the same items.

However, if you own assets such as real estate, it can somewhat help to protect you from inflation. For example, if you have a $200,000 mortgage, that is a fixed amount that will not rise with inflation. You'll still owe the same monthly payment, regardless of how much the dollar has depreciated.

2. Leveraged Investing Produces Scale Economies And Equity

By making mortgage payments, which are ideally covered by rent, leveraged buyers steadily increase the equity in their properties. They can then employ that equity in a variety of ways.

They may put the house up for sale and get their money back plus the equity they built. In order to cut monthly payments and boost cash flow, they might refinance the property at the lower principal amount. The cash from a cash-out refinance could be used for other expenses or as a down payment on a new home.

Additionally, the advantages increase when investors diversify their holdings. The investor who used leverage can buy numerous properties, collect various rents, and benefit from tax reduction through depreciation on each property, whereas the buyer who paid cash has tied up all of the money in a single property and gets the revenue from that property only.

3. Perfect For Buyouts And Acquisitions

Leveraged financing is best suited for brief periods if your organization has a specific growth aim, such as carrying out an acquisition, management buyout, share repurchase, or a one-time dividend because of the added expense and hazards of piling on debt.

Disadvantages Of Using Leverage For Real Estate Investing

1. Losses Multiplication

The primary and most widely feared disadvantage of leverage is its ability to magnify losses when times are tough. When things are going well and the markets are on your side, leverage is a fantastic tool to have on your side, boosting your earnings and speeding up your returns. However, when markets and positions begin to move against you, things can quickly become difficult, with leverage turning against you, potentially causing extensive damage to your trading portfolio. When you win with leverage, your earnings have unlimited potential, but your losses can also be unlimited.

2. If You Can't Pay, You Could Lose A Lot Of Money

This could be the most dangerous aspect of leveraged real estate. You could easily over leverage yourself and struggle to make payments. There could be an emergency that results in income loss or additional expenses.

If you are unable to pay, your lender may foreclose on the property. If they are unable to recoup their full value, they may be able to pursue your other assets as well (depending on laws in your location).

For years, foreclosure damages your credit score and ability to obtain future loans. No matter how many properties you own, it's not something you want to go through!

Conclusion

Real estate leverage investing is very helpful as it may be found to be a healthier way of making more profits with the use of borrowed money. However, in order not to fall victim to so many debts, it is highly recommended to seek the advice and services of a real estate coach as they always help to coach you in the right direction.

If you want to learn more, you can book a personal one-on-one coaching call with me. I have helped thousands of RE Investors maximize their budgets and achieve financial success through real estate investing. Only limited slots are up for grabs, click here to book a call.