Oxford Dictionary Definition:
Leverage – The use of credit or borrowed capital to increase the earning potential of shares.
Leverage is the key. As an investor you will need to get comfortable with having debt … good debt….because it’s debt that creates the leverage by using other people’s money.
Using leverage is a not so hidden secret for investors. This is a great way to expand and grow your portfolio.
Jake and Sally have both inherited £100,000 each. They both decide to invest it property as they want to create passive income with this money and build a retirement plan.
So far so good…
Jake decides to buy a 3 bed semi-detached house in cash with the £100,000 with a rental income of £550 per calendar month.
Sally decides to buy x5, 3 bed semi-detached houses putting down a 20% deposit on each and having a £400,000 mortgage for all 5 properties each with a rental income of £550 pcm.
After estate agency fees and landlord insurance Jake nets £454 pcm (£5,448 per annum) with a return of 5.4%
After mortgage payments, estate agency fees and landlord insurance Sally nets £1,810 pcm (£21,720 per annum) with a return of 21.7%.
In 10 years time both Jake and Stacey’s properties have increased in value, let’s say property values are increasing by 3% per year (which is realistic)
Jake’s property is worth £130,000 making him £30,000
Sally’s 5 properties have also increased in value (see the table below)
|Purchase Price||Current Value||Profit|
Sally property portfolio is now worth £650,000, let’s also say Sally hasn’t paid a single penny off her mortgages, she has still made £150,000.
These figures are pretax profit however you can see the benefit of using leverage to your advantage.
Some people crave security, which comes in different forms (Jake and Sally) Whether you are Jake or Sally, it really doesn’t matter, as long as you know which one you are. Some people are great risk takers and other aren’t. The thought of having a £400,000 mortgage can be crippling.
My dad made his money by being a low – low medium risk taker and he is perfectly happy with it. So he should be! He has achieved great things in his life and built a company from scratch, made it very successful. He lives in a lovely house which is mortgage free and also has a holiday home in Europe. For him, this is the “good life” (I say it like that, as the good life is different for everyone)
I would be Sally however. I could live with the thought of having a mortgage of £400,000, I am earning a bloody good living from the rental income and providing the mortgage is paid and other overheads are covered, the rest is gravy.
I hope you have found this post helpful.
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