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Investing is common practice amongst people looking to grow their wealth, build passive income and free themselves from the shackles of nine-to-five work life. While there are plenty of ways to invest your money and generate meaningful returns, one of the most popular methods is through leveraging real estate.
By leveraging real estate, investors gain the ability to buy larger assets, generate greater returns, and generate passive income that otherwise would have been unattainable to them through their present means.
So, what exactly is leveraging real estate and how can it help investors succeed and build meaningful investments that will help them grow their portfolio? Let’s take a look.
But first, if you are interested in learning more about leveraging real estate to finance your investments, click the link below to book a free strategy call with our mortgage team at LendCity.
What Is Leveraging Real Estate?
In essence, leveraging real estate is the process of using borrowed money in order to financing real estate purchases, renovations, and more. So, that means that unless you are buying a property outright with your own money and paying in-full, buying real estate is going to require leverage.
There are a variety of tools you can use in order to start leveraging real estate. These tools are:
- HELOCs (Home Equity Lines of Credit)/Home Equity Loans
- Portfolio Loans
- Private Loans
- Business Lines of Credit
While each tool has their own terms and benefits, they each serve the purpose to provide you with funds in order to complete your real estate transactions through leveraging the property in question.
The Benefits of Leveraging Real Estate
There are five key benefits of using leverage as a real estate investor that you should know.
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Increased Buying Power
The first and greatest advantage to using leverage when investing in real estate is the fact that your buying power is going to be much greater with leverage than it would ever be without it.
For example, if you have $50,000 in your bank account, your options to buy real estate would be greatly diminished. However, if you went to a mortgage lender for a loan and got approved at an 80 per cent loan to value for a mortgage, you can leverage a property up to a maximum price of $250,000.
This increases the number of options you have as an investor and maximizes your ability to explore the market.
Leveraging provides an opportunity to increase your returns on your investment through compound interest. By using someone else’s money to invest, you are spending less up front, then as the asset appreciates over time or through renovations, your returns will be greater while the amount of money you owe back to the lender remains consistent.
It also allows you to purchase properties with higher rent yields and appreciation rates than you may otherwise have been able to afford since some of these properties come at higher initial costs. This is especially true in heavily populated and rapidly expanding markets such as Toronto.
Diversify Your Investments
Another key advantage to using leverage is the ease with which you can diversify your investments. If you had enough to buy one property outright, using leverage to put down only 20 per cent on that property would allow you to buy up to five properties of the same value instead. This means that you can more easily divide your cash between multiple investments.
Diversification is beneficial in multiple ways because not only does it allow for multiple streams of income from separate properties, but it also makes your portfolio safer because dips in the market are less likely to impact all of your investment properties at one time provided you buy multiple types of properties in different neighbourhoods and areas.
There are potential tax benefits for real estate investors who use leverage instead of buying a property outright that you should know about. Most notably, the interest paid on mortgage loans and other property loans has the potential to be tax-deductible. This means that by simply paying your required mortgage or loan payments, you are potentially able to reduce your taxable income and save money each year on taxes.
As well, in some cases a property depreciating can be used to offset rental income and reduce your tax liability for a property.
To ensure that these benefits apply to you and your investments, make sure to consult a tax expert so that you can plan your finances accordingly.
Generate Passive Income
By using someone else’s money to leverage an investment property, you gain the ability to generate passive income more easily and more freely. This is excellent for wealth creation because after all of your expenses are paid through rental income, you are likely to be left over the with profitable cash flow without spending too much of your own cash up front.
The Risks of Over-Leveraging Real Estate
While leverage is an important tool for investors, it is also important to note that it comes with a few different areas of risk.
Most notably, when you leverage a property, you are often giving equity in that property to the lender and thus putting your ownership of the property on the line in the event you wind up defaulting on the loan. So, it is important to weigh the risks before you make a purchase or leverage an existing real estate investment.
Get the Best Available Loans
One of the best ways to mitigate risk is to secure a mortgage or real estate loan that offers you the best available rates, terms and conditions available. That way you know that the financing you receive comes with the lowest risk of defaulting and the highest chance of working towards the benefit of you and your portfolio.
That is why at LendCity, we work with a wide network of lenders in order to do exactly that.
So, if you would like to get started today, simply visit us online at LendCity.ca or give us a call at 519-960-0370 to book a consultation. Alternatively, you can click the link below to book a free strategy call with our team at LendCity today.