He indebtedness It is a common strategy for accumulating wealth. Data from the Association of Real Estate Agents and Companies of the Dominican Republic indicate that close to 70% of buyers of commercial real estate resort to debt financing. Leverage is about acquiring real estate from a minimum investment.
But, What exactly is leverage? For Yudelka Parra, financial and real estate advisor, leveraging, in the case of real estate investments, refers to invest in real estate using the financing as leverage to achieve the acquisition of the asset, without having to have 100% of the equity to do so.
This investment strategy applies to the purchase of your first living place, especially when you do not have all the resources, as well as for the acquisition of real estate for investment purposes. The latter recommended by Parra, because if you had all the capital (with a proper investment plan) you could get two properties instead of one.
For example, if you are planning to buy an apartment for $150,000, using bank leverage by 80%. This means that you must have an initial payment of US$30,000 and have the ability to pay for a loan for $120,000 paying an approximate monthly fee of about $800.
In that hypothetical case, the person with only $30,000 acquired a property worth US$150,000 using financial leverage.
Benefits and risks
The benefits of leverage when investing in real estate they are multiple. Among them are: acquiring 100% of a property with only 20% of the down payment, that is, 80% will be financed; increase your assets by gaining capital gains and the debt decreases over time; and it leverages and/or benefits from all the legal purification and processes carried out by the banks before giving the final okay.
You can also plan extraordinary payments to the capital, in order to pay less interest and pay off the financing in a shorter time”, the adviser stressed.
Also, you can use leverage private, that is, directly from the owner of the property or some investors who believe in your project, in case you decide to carry out your own development. However, in all instruments of investment there are risks or elements to take into account, leverage is no exception.
You must hire mandatorily insurance coverage for property and life policy, so that in the event of death the property is settled.
The real estate consultant explains to elDinero that the cost effectiveness of a leveraged investment is different depending on the purpose of the owner. For example, under the scheme of revenue of capital, that is, it acquires the property for the purpose of reselling it, it is determined by the difference in the sale price less the purchase price, which is equal to the capital gain. Or with the formula: profitability= Profit/own capital invested x 100.
Meanwhile, under the scheme Passive income (rentals) is determined by totaling the annual rent and dividing it by the equity invested by 100.
This alternative is widely used, because the rentals They help pay off the financing, while the property gains equity over time. Therefore, you can make the decision to sell it at a higher cost.
“The analysis and convenience of the feasibility of the investment are made based on the risk-free rates that are being handled at that time in the market”, he said.
He urges people to make the decision part of a thoughtful plan and not out of emotion.
Elements to take into account
- Payment capacity. It is vital to keep up with the payment of your monthly installments.
- Interest rate. High and variable interest rates can affect your ability to pay.
- costs. It is important to consider legal expenses, such as taxes and any improvements that must be made.