Mortgages & The Power Of Leverage Explained | Property Investment | Real Estate Investing Tips
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Mortgages & The Power Of Leverage Explained | Property Investment | Real Estate Investing Tips


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 return. 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 my opinion. 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. If this is your first time to the channel,
please subscribe so you don’t miss any of 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.

13 Comments

  • Chiara Zin

    Andi would you think it's possible to get a 'buy to let' mortgage when you don't have a job or you are self-employed and one room out of 2 in the flat will basically cover the mortgage payment? The other room would be for me to live in. So, yeah… it seems to be a residential mortgage. But the point is if, with a big deposit, the rental income would be enough to obtain a mortgage with no steady income from a job.

  • Teddy Smith

    I think I made a mistake in not leveraging my properties when I first started.Got my eyes on another townhouse. When the opportunity arises, I'm gonna leverage it.

    Good video! Production skills are on point.

  • cocoococoo

    Hi there, I have just bought my first property for 80k, I have bought it outright as i failed to get a morgage (another story) and my parents helped me. I am living there now and making a small monthly income from my lodger. I bought this property because i didn't think i'd live here more than a few years and it had a good yield and paid no stamp duty. The property had tenants paying 600/month when i bought it. the property's previous owner bought it brand new in Leeds 10 years ago for 132,000 just before the financial crash, So I am hoping the market will recover in Leeds and make me some capitol growth. But I have started to realize from looking on line i would be better off if i could utilize some leverage, so hopefully when i've learned more i will Remorgage and invest that money in multiple BTL's. I am a bit scared of investing in the North (being a Southerner)…. But anyway do you have any advice or tips for me? I've only read one book and watch youtube things and i want to make good decisions! Any tips would be appreciated, thanks

  • Tim Feltro

    Andy, I love your videos, thanks for what you are doing. On another side, could you please explain what are the risks of leverage?

  • Bogdan Masca

    Hello Andy Great video. If you make with no levarage 1500 pounds passive income from each property how do you add that to the whole value? and if buy with levrage and you have to pay your mortgage how do you add that to your cost. in order to determine the ROI per year. I belive i calculated it once at 27% per year? SAY you have to pay 1200 pouns monthly mortgage for each property giving you a positive cashflow of 300 pounds. How do i calculate the ROI then?

  • Peace & Serenity

    What about i come from a country that each home that I had my eyes on cost 1 mil. I can come up with a few hundred k but I want to own more not just two. HOW? The proerty and even car in our country cost 5-6 times more than oversea price. Like your video tho.

  • peteq1972

    But if the rents only cover the mortgages you still get hardly much a month from them, you just own 4 houses and still have to go to work to live, they act more as a pension when you sell them in years to come, but what about my life now? Not when I'm an old man

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