Investing in property has many benefits; good long-term capital growth, a regular income, tax effectiveness and relatively low risk. But one of its greatest advantages is its high leveraging potential.
Leveraging is a commonly used term in the investment game that simply means borrowing money to finance an investment. Although people can be reluctant to borrow money, as they see it as a big risk, leveraging allows you to purchase more property than you could otherwise afford.
Leveraging allows you to purchase more property than you could otherwise afford.
The benefits of leveraging
Here’s an example of how it works.
If an investor had $50,000 in cash to invest, they could safely put that in a term deposit earning 3% interest per year. This would mean that in one year the investor would earn $1500 ($50,000 x 3%). There is no risk involved and very little hassle.
There are more risks and hassles associated with investing in property but the financial rewards can also be greater. The same investor could use that $50,000 as a deposit for a $500,000 property; if the property value increased by 3% in one year, the investor would have earned $15,000 ($500,000 x 3%). If the increase in the value of the property was around a long-term capital growth average of 8% per annum, the investor would be $40,000 richer. That’s a pretty good gain!
Be careful. Just as leveraging can magnify your potential returns, it can also expand your losses. If the property dropped in value by 5%, it would be worth $475,000. This means that you would now be $25,000 poorer. You can minimise your risk by buying the right property, in the right street, in the right suburb, with the right loan.
Just as leveraging can magnify your potential returns, it can also magnify your losses.
Leveraging has some risks involved but, as with so many investments, if you are willing to take a greater risk you can potentially enjoy greater returns. Good luck!
Story by Peter Kouilzos. View it here