I will let you in on a little secret.
The return you get on real estate if
you pay for your purchase using all cash (without getting a loan) isn't much
higher than what you can achieve with other types of investments.
Of course, with real estate you usually
don't pay using raw cash; instead, you use someone else's money to buy your
properties.
That is, you put down a small deposit,
often 20%, and the bank finances the rest.
This is called leverage.
Archimedes said, "Give me a lever
and I'll move the earth."
As investors we don't want to move the
earth, we just want to buy as much of it as we can!
The ability to use leverage with real
estate significantly increases the amount of profit you can make and,
importantly, it allows you to purchase a significantly larger investment than
you would normally be able to.
Because of its history of security,
stable income and proven capital growth, residential real estate is regarded as
prime security or collateral for loans, which means that banks may lend you as
high as 90% of the value of your property.
They won't lend this proportion to
other types of investments.
If you buy shares in the banks
themselves, the banks may only lend you 65% of the value of their own shares,
and they only lend 70% or so of the value of commercial properties.
This makes the residential property an
appealing vehicle for building wealth.
In the technical sense leveraging, or
gearing as it is also known, means using a small effort to move a large object,
like the gears on your bicycle where you have to pedal a small rotation to turn
the large back wheel.
In the financial sense, leveraging is
using a small amount of money to control a large asset.
You do this by borrowing money and
mortgaging your property and using this borrowed money to invest in a larger
asset.
The more highly you are geared, the
more money you have borrowed, and the lower your invested capital in relation
to your borrowings.
As you can see from the examples in the
table above, the higher the degree of gearing, the more leverage you achieve,
and the more your returns are magnified.
But be warned, gearing not only
magnifies your profits, if the value of your investment falls, but your losses
are also magnified as well.
RealRenta
has all the tools that a property manager has but for less than ¼ the cost
of a property manager.
You can now manage your Residential,
Commercial or share/student accommodation property
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and the cost is less than a cup of coffee a week to manage your rental
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RealRenta
also has a free vision, so why not check it out.
Jason Gwerder
Friday, 2 February 2024
