Leverage What?

Source: www.heatherforsenate.com/

Post by Garry Macdonald of Property Buyers Australia

 

What Is Leverage?

The Macquarie Dictionary defines leverage as the action of a lever...power of action, means of influence.

One of the issues that serious investors must come to grips with is the concept of creating leverage. Debt facilitates leverage. 

Leverage is the use of other people's money (OPM) to enhance your ability to build wealth. In the case of real estate investing, leverage is facilitated by financial institutions (banks, building societies, etc).

Your Choice To Borrow Other People's Money

Our parents always told us to buy a house and pay it off as quickly as possible...owe nothing to anyone.

Paradoxically, there are very few people in the world who possess sufficient cash to be able to purchase real estate without borrowing money. 

We are therefore left with a choice: to borrow (and therefore incur debt),  or not to borrow (and therefore not incur debt).

Prior to making this choice, bear in mind that choosing the latter (not to incur debt), will very likely have a significant impact on your ability to build wealth.

Provided you consult your professional advisors, carry out the necessary research and buy well, it is recommended that you utilise OPM.

 This enables you to both purchase more real estate and increase your 'cash on cash' return (ie the investment return on the cash you outlay).

Applying For A Loan

When you apply for a loan there are fundamentally three criteria that most financial institutions consider:

1. Serviceability - this reflects your capacity to repay the loan.
2. Loan to Valuation Ratio (LVR) - refers to the amount of security you have. 
3. Credit History - your history of borrowing and repaying is maintained on a data base with organisations called credit bureaus. 

 

Financial institutions will have a set of well established criteria based on the above that you must satisfy.

You will find however, that as you develop a positive, longer term relationship with financial institutions and prove that you are capable of managing your property investment business, most financial institutions tend to become a little more flexible.

You should always remember however, that financial institutions are required by legislation to ensure they act responsibly when lending.

"Money isn't everything but it's a long way ahead of what comes next"  Sir Edward Stockdale

 

Next week, we'll consider some of the advantages and disadvantages of leverage. 

 

If you would like to discuss your property investment options and how we can work with you to ensure you achieve financial freedom in the shortest possible time while minimising your risk, drop us a line at info@yourpropertybuyer.com.au or call our office on 1300 507 559 and we'll arrange a convenient time to identify and discuss your property buying options.

 

Here's to your property investing success!

 

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Garry lives on the sunny Gold Coast in Queensland with his wife and two children. Garry is a business man committed to helping other achieve their financial goals.

Garry and the team at Property Buyers Australia are excited to announce thier new Virtual Buyers Agent service designed to provide sound analysis to ensure you buy the right property in the right location at the right price. Check it out here.