Using Leverage for a Greater Return On Investment
We are all familiar with purchasing property and using a deposit to acquire the property then borrowing to complete the sale.
When borrowing money we are using leverage.
For example if you are purchasing a property at $400,000 and you put down 20% deposit you will be using an $80,000 deposit and leveraging the balance.
There are some different thoughts on why people use leverage but with property investment many experts believe that it is because the Return On Investment (ROI) is greater when using leverage.
With the above example any return that you have will be on the $80,000, whereas if you had not leveraged the property then any return would be on the full $400,000. You can see that the return on $400,000 would be significantly less.
How much should you leverage?
If lending through banks the amount you can leverage is often decided for you, but if lending through other sources if may be up to you to decide how much leverage you can take on.
At the end of the day you are the only one who can decide how much leverage you are willing to suffer. Some people have a higher tolerance for leverage whereas others are very uncomfortable with a lot of leverage. When it all comes down to the final crunch you are the one that has to be happy with it so go by your gut instinct and if you are not happy with the amount of leverage don’t go ahead if you are buying or if you are leveraged now to a level you are not happy with then maybe it would be a good idea to sell a property.
Filed Under: Investment Strategies
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