Leverage is very powerful in the world of
property investing, and understanding leverage is the topic of this video. Hi, I’m Andy Walker from monoperty.com where
I blog online about my journey as a property investor and landlord, sharing what works
for me, and what doesn’t, to help you start or expand your property portfolio. Leverage is about borrowing money and it’s
used to maximise your buying power and level of returns you can get back and the most common
method is by using a buy to let mortgage. So let me explain the benefits by using 2
examples with some simple pictures, the first one will be using without leverage and the
second will use with leverage. I’m going to keep the numbers and the details
simple so lets assume the buying price of the properties includes the buying costs and
lets say we have 100,000 to invest So you buy 1 property with cash. Brilliant.
Your over heads are going to be minimal which means you will be able to keep the majority
of the rental income that it produces. Overtime the property will appreciate in value, inline
with inflation, and lets say in 5 years time, because we always invest for the long term,
this property is now worth 125,000. You will have then have received a quarter of your
initial cash back on paper, with very little risk, whilst still enjoying a regular passive
income and cashflow from rent. Now in the second example lets look at using
your 100,000 as a deposit to buy 4 properties. You split your cash into 4 deposits of 25,000
and you buy 4 properties for 100,000 each meaning that you’ll have a mortgage of 75,000
on each of those properties. In total, you will have still invested 100,000 but now you’ll
also have 300,000 in mortgages. Your overheads are obviously going to be more expensive now
because you have got mortgages to service and your profit on each property is going
to be less compared to example 1. But because you now have four properties,
and providing you’ve done your homework and due diligence correctly, the total net
income of these four properties can easily surpass the total net income of buying one
property with cash. Now lets look 5 years into the future as we did with example one.
You know have 4 properties worth 125,000 each. That means you have capital growth of 25,000
in each which gives you a total profit of 100,000! You will have doubled your initial
cash investment in 5 years. Amazing! And that, ladies and gentlemen is the power of leverage. Now you can leverage at different amounts
by only borrowing 60, 50% or less to buy fewer properties, or you could leverage higher at
80, 85% or more to buy more properties. I prefer to gear at 75% and that’s a topic
for another video. Now I know some people can be very nervous
about taking on huge amounts of debt, but you have to remember that this is good debt
because it’s providing you a return, you’re buying an asset, and professional investors
like debt. They use it to their advantage. It’s completely different to taking on consumer
debt which you would use to buy a new car or go on an expensive holiday or something
that doesn’t provide you with a regular return. This is how I think about it to give myself
some reassurance. Firstly, I know I’ve done my homework and due diligence and I’m looking
at buying a good property that’s in demand on the rental market that is going to be producing
a good positive cashflow, and secondly, the mortgage lender will only loan me their money
when they have done their own due diligence and they’re happy that the property I’m
looking at buying will make a good buy to let. If they don’t believe that the property
will generate an income for me and that I won’t be able to service the loan and pay
them back in the future, then they won’t lend me the money. I see it as like a safety
net. They’re double checking my checks. Of course there are no guarantees and I know
some people have made bad investments in the past and that they’ve had to sell their
properties at a loss, but in my experience, if you buy right, you will survive market
crashes because rents don’t decreased in times of a recession, so when property prices
fall, I have still been able to service my mortgage without any financial problems, and
as market conditions have improved, I have then been able to enjoy the capital growth. Leverage is a great wealth creation tool and
it’s something that I’d like you to consider, but ultimately it comes down to your own level
of comfort with risk. And I would like to add, that buying one property with cash, is
better than not buying property at all, in my opinion. If you are new to property investing and you
have any questions about leverage, or if you’re an experienced investor and have something
that you would like to add, then please leave a comment in the box below or head over to
monoperty.com/leverage. If this is your first time to the channel,
please subscribe so you don’t miss any of my future videos that are all geared towards
helping you start or improve your property business. Thank you for watching this video
to the end, my name is Andy Walker and I will see you in the next one. bye for now.