Property leverage – it’s one of the tools available to investors when they’re expanding their property portfolio. Some may also call the process of borrowing money to support property investment ‘gearing’.
Leveraging is widely known to be one of the best ways to grow a buy-to-let property portfolio and increase profit. With interest rates in England at a historic low, now is a particularly good time to take action.
Investors will often enquire to learn more about what it means to leverage, how it works and what are the benefits and risks.
What is property leverage?
Property leverage is using borrowed money, usually from a lender, to purchase a property instead of buying the property entirely with their own capital.
The leverage amount will account for a certain proportion of the purchase price with the investor paying part of the total purchase price with their capital.
The ability to borrow money when buying buy-to-let property is one of the reasons this investment class is so appealing.
It gives investors the ability to either purchase a buy-to-let property that costs more than the capital they have available or by allowing them to spread their capital across several properties.
How does it work?
To leverage a property an investor will need to apply for financing from a lender such as a bank or building society.
A lender will consider the value of the property and the predicted rental income that it’s expected to produce together with an investors personal financial position in order to decide whether they’re happy to loan money, the amount of the purchase price they’ll cover and the terms on which they’ll do it.
It might be that the lender offers to loan 75% of the total purchase price meaning the investor will need to cover 25% with their own capital. For example, if a property price is £100,000 the lender will loan £75,000 and the investor will pay £25,000 towards the purchase.
Benefits of leveraging in property investment
The key benefit to leveraging in property investment is the potential to increase the returns on the capital investment as the borrower (investor) will be the one who inherits the capital appreciation on the whole property value, not just the capital they place into the property.
Leveraging allows an investor to do with the money they have available.
If an investor puts 25% down for purchase and uses a mortgage for 75% loan-to-value they will be able to spread their capital much further than if they purchased a property all in cash. This also boosts the return on investment as the capital can achieve four times as much as it would on its own. The uplift is relevant to the capital, not the amount borrowed.
With it currently being cheap to borrow money it’s a very good time to secure lending; the margins are even more attractive.
Avoid risks when leveraging by making only well-informed investment decisions that have been planned and had all elements considered including mortgage repayments, the rental market, void periods and the economic outlook.
How to leverage on property to buy another
Property investing gets more interesting and increases the potential reward when your existing properties are able to assist in the purchase of further buy-to-let homes.
It’s possible to leverage on property in order to buy more properties and scale your portfolio.
This video on our YouTube channel offers a good example of scaling your property investment portfolio.
For example, an investor might start off buying two properties for £100,000 using a £30,000 deposit and 70% leverage on each. By making a considered purchase in an investment hotspot we would expect the investment to grow in value by 20% over 5 years. Meaning there is an additional £40,000 equity across the two properties.
By remortgaging and taking circa £30,000 from this equity pot the investor will be able to purchase a third property for £100,000, further adding to their income and the potential for capital growth without having to place a further large sum of capital into their portfolio.
Finding a buy-to-let property for investment
As a tool available to investors, the ability to leverage is one of the best ways for investors to increase the amount of profit available to them, especially capital growth. Depending on the loan-to-value an investor can earn around 4 times as much capital growth by leveraging their purchase.
To find the greatest success using leverage to fund a buy-to-let property an investor needs to buy property in locations that have true potential for capital growth and offer strong rental yields in a reliable market place.
If you’re thinking about investing in property but are unsure where to buy a property to maximise the potential for capital appreciation we’d be delighted to share insight and offer advice to ensure you make a well-informed purchase – contact us.
*Thirlmere Deacon are not financial advisors, every individual has a unique position that will determine their ability to borrow money for investment. We recommend investors speak to a registered financial advisor prior to purchasing buy-to-let property.