Real estate leverage, a capital generator for all

First of all, I’m not telling you anything new when I say that the best way to invest money is in real estate. The purchase of property meets two essential criteria. Firstly, our need to have a roof over our heads. Secondly, real estate is one of the few areas of investment whose value is almost constantly on the rise. Unlike other types of investment, real estate rarely loses resale value.

But how can you invest in an income property if you don’t have enough money for a down payment?

Let me tell you about real estate leverage.

Real estate leverage

“This phenomenon consists in amplifying forces in the manner of a plank resting on a fulcrum in order to lift a load. So, with a minimum of investment, you can buy a high-value property. The leverage effect means that this income property pays for itself with the rents collected from the tenants who live there. So your apartment block capitalizes on its own, gaining in value as rents rise. The result is equity that matches enrichment,” explains Michel Limoges, a real estate broker for over 32 years.

Rental yield

Indeed, when we own a triplex or apartment block, the rents we collect from our tenants every month are recurring income. This is known as rental yield, and it ultimately generates income. So using leverage is an excellent way of increasing an owner’s investment capacity. For example, you have a down payment of $70,000 and would like to buy a plex costing $470,000. The loan would therefore be $400,000. The leverage effect gives you the opportunity to obtain a loan for the missing amount, thanks to the rental yield you’ll earn by renting out the building’s apartments. In effect, you won’t be making a profit on the down payment alone, but on the total value of your apartment block. Then, after a few years, the real estate leverage effect will even allow you to acquire another income property without necessarily owning the down payment. All you have to do is re-mortgage a building you already own.

real estate leverage
Crédit : Pixabay

Calculations and factors to consider

This method is certainly very interesting. But there are other factors to consider. These include taxes, real estate fees, interest and so on. Rest assured, this is where our role as experienced real estate brokers comes into its own. We’re your advisors, and we’ll make sure that everything is in order, so that you can reap the maximum profit from your leveraged investment. What’s more, we’ll work with you to calculate your loan-to-value ratio, so you don’t go into debt. We’ll determine your options. Then there’s the rental ratio, which is also very important. If, for particular reasons, some of your units become unoccupied, the mortgage must continue to be repaid. On the other hand, if there is little or no market growth, both good and bad returns are possible. To take full advantage of real estate leverage, we’ll explore solutions together and advise you on the best investment, at the right time.

Who can benefit from real estate leverage?

Whether you’re a homeowner or a property owner, both large and small investors can benefit from leverage. In fact, anyone who can obtain a mortgage can take advantage of leverage to buy their first rental property. It’s a tried-and-tested method of getting started in real estate. The first step is to acquire a multi-unit building that can be upgraded and then increased in rental income, year after year. At a later stage, all you need to do is leverage your investment by adding a second and then a third multi-unit building.

The different levels of real estate leverage

The level of leverage is related to the amount you can invest for the down payment. This means that the amount available varies. The smaller it is, the more attractive the return on capital for the investor. Together, we can set realistic objectives and establish a strategy tailored to your situation.

Make an appointment today with our team to evaluate your investment project, thanks to our real estate leverage and multi-residential expertise.

Main photo credit : Unsplash