How to Leverage Using your Property
In this article, we will be exploring on how you can increase your financial portfolio by leveraging on your property.
What is leverage?
In the property world, the term leverage simply refers to the borrowing of finances to increase potential returns. Rather than coming up with the cash needed to invest in property, you would borrow or take a loan for your new purchase.
Scenario #1
Let’s take person number 1, he listens to his mum’s advice to save and have $40,000 in savings but not invest in anything else. The money sitting in the term deposit is collecting interest of 0.2% per year. This equates to about ~ $80 per year or ~$401.60 in 5 years’ time.
Scenario #2
Let’s compare that to another young guy listens financial podcasts and reads a lot of financial books. He invests his $40,000 into an assets, to purchase a property for $400,000. The $40,000 can be used to cover the cost of purchase which is about $5000 because he is a first home buyer and the remaining $35,000 will be used to cover the deposit of the new purchase.
Over time he would accumulate the following:
1. Rental return of about 4-5% p/year which is a lot more than what the bank’s term deposit return at 0.2%.
2. Asset appreciation, in general, the property price could go up by 2-5% or more depending on area and market.
So by the end of the five years in comparison, his property value can potentially go up to $463,000 if the property value increase by 3% and $500,000 if it increase by 5%
What are the risks?
There is always risk involved, as an investor you need to make sure that you have enough cash flow to cover your mortgage repayments over time. Failure to do so could see your property repossessed by the banks.
Hence Buying positive cash flow properties might be a good idea to help with the repayment of the mortgage In WA, If you buy risky property such as an apartment off the plan, the value might fall down before you even move into the property.
So I would encourage you to talk to your finance broker as they will be able to help you to structure your loan properly.
I hope this article gives you a bit of an insight to grow your financial portfolio.
