A Beginners Guide to Real Estate Leverage
Real Estate Investment is a smart strategy to diversify one’s investment portfolio regardless of what type of real estate one pursues. It may be a popular and wise approach, but success in this domain requires measured risks and informed decisions.
In recent years, people have been leveraging real estate as an investment to accelerate their wealth. Most of them may still misunderstand the concept of leverage real estate as it relates to debt, but it is a simple idea with strategic risk and significant benefits.
Read further to know the concept of leverage, its types, and its benefits in real estate.
CONCEPT
Leverage is a technique involving an investor lending money to refinance a property, hoping to increase returns. In short, you use others’ money to purchase your asset with the hope that your property will generate a significant profit.
The concept might sound appealing, but it involves risk, especially when the investor financing expenses go beyond the asset income or if the asset value decreases.
Therefore, leveraging works best only when the property values and rents are increasing.
To leverage a property, the investor can borrow money from the bank, credit union, building society, hard cash, or private money lender. On the other hand, before loaning the money, the lender can analyze the property value and determine the generated rental income combined with the investor’s financial status.
Usually, the real estate leverage benefits investors by reducing the price they need to buy a property. For instance, the investor pays only 20% of the total cost for the desired rental property, with the remaining 80% covered by the lender.
Types of Real Estate Leverage
There are several ways to get leverage or borrow money, and these sources have various eligibility requirements, terms & conditions, risks, etc., while loaning money. One can check these criteria before lending. Below are a few popular ways:
Conventional Mortgages
Most people associate real estate leverage with mortgages. You are utilizing the loan to buy or maintain a property. The downside of this approach is that the applications go through a strenuous underwriting process that takes 30-60 days for the closing phase.
Portfolio Loans
Portfolio Loans or Portfolio Mortgage slightly differ from conventional mortgages as they don’t require a rigorous screening process, and the lenders hold the debts in a portfolio loan rather than selling them in the secondary market.
HELOC – HOME EQUITY LINE OF CREDIT
HELOCs are a typical method of financing real estate investments. It functions similarly to a credit card with the property as collateral and allows you to draw as needed. You only pay for the borrowed amount rather than the entire amount of credit available. The property can be lost if the investor fails to deliver in time.
Private Loan
This approach requires the help of your connections like a family member, professional or other investors, etc.
Benefits of Leveraging
Below is the list of benefits that one can gain due to real estate leverage:
- The significant advantage is that you can acquire a property you initially thought was out of reach and couldn’t afford on your own.
- It boosts your adequate returns.
- It can help you boost your portfolio quickly.
- One can earn additional rental income.
- It protects the investor against inflation.
Final Words
If you’re finding ways to maximize your profits, leverage real estate as a great investment strategy that allows you to finance your investment property with others’ money. However, it’s essential to understand how it works before using it, or you’ll end up magnifying your losses if misused.
