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
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
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.
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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.