Transcript

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Leverage is very powerful in the world of property investing, and understanding leverage
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is the topic of this video.
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Hi, I’m Andy Walker from monoperty.com where I blog online about my journey as a property
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investor and landlord, sharing what works for me, and what doesn’t, to help you start
00:27
or expand your property portfolio.
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Leverage is about borrowing money and it’s used to maximise your buying power and level
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of returns you can get back and the most common method is by using a buy to let mortgage.
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So let me explain the benefits by using 2 examples with some simple pictures, the first
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one will be using without leverage and the second will use with leverage.
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I’m going to keep the numbers and the details simple so lets assume the buying price of
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the properties includes the buying costs and lets say we have 100,000 to invest
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So you buy 1 property with cash. Brilliant. Your over heads are going to be minimal which
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means you will be able to keep the majority of the rental income that it produces. Overtime
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the property will appreciate in value, inline with inflation, and lets say in 5 years time,
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because we always invest for the long term, this property is now worth 125,000. You will
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have then have received a quarter of your initial cash back on paper, with very little
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risk, whilst still enjoying a regular passive income and cashflow from rent.
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Now in the second example lets look at using your 100,000 as a deposit to buy 4 properties.
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You split your cash into 4 deposits of 25,000 and you buy 4 properties for 100,000 each
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meaning that you’ll have a mortgage of 75,000 on each of those properties. In total, you
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will have still invested 100,000 but now you’ll also have 300,000 in mortgages. Your overheads
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are obviously going to be more expensive now because you have got mortgages to service
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and your profit on each property is going to be less compared to example 1.
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But because you now have four properties, and providing you’ve done your homework
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and due diligence correctly, the total net income of these four properties can easily
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surpass the total net income of buying one property with cash. Now lets look 5 years
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into the future as we did with example one. You know have 4 properties worth 125,000 each.
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That means you have capital growth of 25,000 in each which gives you a total profit of
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100,000! You will have doubled your initial cash investment in 5 years. Amazing! And that,
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ladies and gentlemen is the power of leverage.
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Now you can leverage at different amounts by only borrowing 60, 50% or less to buy fewer
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properties, or you could leverage higher at 80, 85% or more to buy more properties. I
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prefer to gear at 75% and that’s a topic for another video.
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Now I know some people can be very nervous about taking on huge amounts of debt, but
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you have to remember that this is good debt because it’s providing you a return, you’re
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buying an asset, and professional investors like debt. They use it to their advantage.
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It’s completely different to taking on consumer debt which you would use to buy a new car
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or go on an expensive holiday or something that doesn’t provide you with a regular
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return.
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This is how I think about it to give myself some reassurance. Firstly, I know I’ve done
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my homework and due diligence and I’m looking at buying a good property that’s in demand
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on the rental market that is going to be producing a good positive cashflow, and secondly, the
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mortgage lender will only loan me their money when they have done their own due diligence
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and they’re happy that the property I’m looking at buying will make a good buy to
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let. If they don’t believe that the property will generate an income for me and that I
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won’t be able to service the loan and pay them back in the future, then they won’t
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lend me the money. I see it as like a safety net. They’re double checking my checks.
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Of course there are no guarantees and I know some people have made bad investments in the
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past and that they’ve had to sell their properties at a loss, but in my experience,
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if you buy right, you will survive market crashes because rents don’t decreased in
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times of a recession, so when property prices fall, I have still been able to service my
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mortgage without any financial problems, and as market conditions have improved, I have
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then been able to enjoy the capital growth.
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Leverage is a great wealth creation tool and it’s something that I’d like you to consider,
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but ultimately it comes down to your own level of comfort with risk. And I would like to
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add, that buying one property with cash, is better than not buying property at all, in
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my opinion.
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If you are new to property investing and you have any questions about leverage, or if you’re
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an experienced investor and have something that you would like to add, then please leave
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a comment in the box below or head over to monoperty.com/leverage.
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If this is your first time to the channel, please subscribe so you don’t miss any of
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my future videos that are all geared towards helping you start or improve your property
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business. Thank you for watching this video to the end, my name is Andy Walker and I will
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see you in the next one. bye for now.

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