Leveraging for mind-boggling profits
When you are deciding how to invest and what to invest in, one of your concerns will be how to make your money work hardest for you, rather than you work for it. If you’re like most people, you work hard enough already. An investment opportunity should help you break the cycle of work, eat, sleep – not add more work to your daily routine.
Residential investment property is the only investment asset that you can buy and benefit from other people’s money. You can’t borrow money to invest in shares, bonds, or commodities. Make 7% on a £50,000 investment in the stock market, and you’ll make £3,500. The same £50,000 invested in a residential property that increases in value by the same 7% could make you around £7,000. That’s like making free money – not only is your money working for you but so is other people’s. It’s perfectly legal, and it’s called ‘leveraging’.
In this article, I’ll show you how leveraging works and how to make sure you make other people’s money work hardest for you.
What is leveraging to buy an investment property?
Leveraging is what makes property investment so rewarding. It’s an investment term for borrowing to invest. When you do this, the money you make on the investment (after any interest has been paid) is yours to keep. It’s like free money.
What’s the secret to making leveraging work for property investment?
There’s no secret to using leveraging. There are no complicated mathematical equations to work through, and the investment strategy couldn’t be simpler. It’s also easy to figure out if leveraging your money (the deposit) is worth doing:
- Simply put, if you expect the income or gain to be higher than the interest charged on the borrowed money (plus other costs), then leveraging is a winning investment strategy and you can give the property investment opportunity the green light.
That’s it, right there.
Leveraging in action
Let’s say that you’ve been offered a property investment opportunity and want to figure out if it’s worth investing. You’ve got a deposit of £50,000 which is currently earning 1% in a cash savings account. The investment property is valued at £200,000. You expect a gross rental yield of 7.2%, and:
- When you speak to your buy-to-let mortgage broker, she tells you that based on the property value, your credit score, and expected rental income, you could get financing at 4.5%. So far, so good.
- Working through a cash flow forecast, you calculate that other costs (property management, maintenance, legal stuff, etc.) will add up to around £3,000 per year.
- Adding the mortgage interest to other costs, your total expenses will be around £9,750. It will leave you with a net rental income of around £4,650.
That’s £4,650 of income generated from your investment of £50,000. Put another way, a return of 9.3%.
It could be argued that, in this example, you’ve just created £4,650 of free money every year – that’s the difference between what you were getting on your £50,000 cash saving and what you are getting from your investment property.
What about capital gain?
The benefits of leveraging get even better, because not only could you gain free money as income, any uptick in price flows directly to your pocket.
Let’s consider the above example again. If it rises in value by, say, 3% per year over five years (that’s way below the UK long-term average of around 8.75%) then at the end of the five-year period it will be valued at around £231,000. The profit of £31,000 is all yours to keep should you sell the property.
In this example, you’ve made a capital gain of £31,000 and had five years of net rental income of £4,650. That’s a total gross return of £54,250 – or more than 100%. Put another way; you’d need to save your money at an interest rate of around 15.75% to get that return in a cash savings account.
What if the cash flow is negative?
Not all investors use leverage to invest in positive cash flow properties. If you believe the growth in the value of the property is going to be higher than the interest rate you pay on the mortgage plus the negative cash flow, then leveraging could still produce free money.
For example, let’s say you borrow £150,000 to buy an investment property valued at £200,000. You calculate that it will produce a negative cash flow of £75 per month (£900 per year). To keep your investment above water, you’ll need to subsidise it by £900 per year.
On the face of it, it looks like your property investment will cost you £4,500 over five years.
However, if you expect the property to rise in value by, say, an average of 9% per year, after five years it will be worth approximately £307,725. You’ll have made a gross profit before tax of £103,225 (£307,725 – £200,000 – £4,500). Put another way, that’s the equivalent of a little more than 25% annual return on your original £50,000 investment.
How do you benefit from leveraging in property investment?
Leveraging can be used to boost both income and capital gain, depending on your investment objectives. Though it works best when property values are rising, it can also be used to take advantage of investment opportunities in weak markets.
Ultimately the success of leveraging in property investment rests on buying in the best places to invest in property UK. So, investment research is key to ensuring that you invest where the property fundamentals are strongest: shops, schools, transport links, major employers and major investment. Do this, and you’ll find that a strategy of leveraging in property investment could produce gains beyond your financial advisor’s most vivid imagination.
Contact one of our team today on +44 (0)207 923 6100, and we’ll introduce you to our property hotspots algorithm and investment property selection process:
- We analyse 108 data points across 324 areas
- We select the minimum criteria and produce bespoke investment guides
- We dive deep with our due diligence
- We calculate cash flow to crunch the real numbers
Profiting from a hassle-free investment in property, and making free money thanks to leveraging, really couldn’t be any easier than this.
Live with passion
Brett Alegre-Wood
