How Can One Leverage Equity to Build an Investment Property Portfolio?

Build an Investment Property Portfolio

Do you know what ‘leverage’ is? If you don’t, let us first explain it’s meaning as our blog is about how one can leverage equity to build their investment property portfolio!

In real estate, leverage is using borrowed money to buy a property. When one is leveraging a property, he or she will borrow funds from a lender to be able to purchase an investment property instead of covering the entire purchase price himself or herself.
Being able to leverage your investment is one of the reasons real estate investing is so attractive.

What’s the idea behind and benefits of leveraging real estate?

Simply put, the idea behind leveraging real estate is to be able to increase your own returns by using other people’s money at first, and not having to put as much of your own capital into buying a property.

How does it help real estate investors?
Leverage allows a real estate investor to either purchase a property that costs more than the amount of money they have available or to spread out their cash across multiple properties, hence building their investment property portfolio.

Why do you need to use leverage in real estate?
You may choose to use leverage in one of the two or both the scenarios:

  • You don’t have enough cash to purchase the investment property you want but want to purchase multiple properties to build your portfolio.
  • You want to maximise your returns by putting less cash into each property investment.

How leverage helps?
Leverage can increase your returns when the interest you’re paying on the loan is less than the rate of return on the investment.
For example, if the rate of return on your investment property is 16% and at the same time you’re paying 10% on the loan you took from the lender, you’ll end up earning the 6% difference from the lender’s money.

Invest $240,000 and buy a property worth $1.2 M

– You’ll be able to maximise your returns because you’re investing more!

For example, you invest $240,000 in a property worth $1.2M and achieve an annual return of 5%. Your return will be $60,000. However if you used that $240,000 as a deposit on a $600,000 investment and borrowed the remaining $360,000, an annual return of 5% means you’ll earn $30,000 before considering the cost of borrowing.

– You will be able to reduce your taxable income, therefore, tax benefits!
If you borrow to invest, you can deduct the interest you’ll pay back from your taxable income which will reduce the amount of tax you need to pay.

Also you can take into consideration that if you purchase an investment property you can deduct a range of other expenses from your taxable income, including:

– Property management costs

– Repairs and maintenance expenses

– Depreciation on appliances and furniture

We hope, by now, you’ve a brief understanding of what leverage is and why you should leverage to invest in a property and build your property portfolio!

With an array of benefits, also come some risks that our expert risk assessment team will be able to explain to you best!


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