How to use leverage to make money from property investment
publication date: Oct 27, 2010
author/source: Guest article by Sarah Walker of Platinum Property Partners
Utilising leverage to maximise your property investment return
Leverage, or being highly geared, acts just like a magnifying glass. When the market moves upwards - and in your favour - leverage massively improves your returns.
In August 2007, when Amstrad's merger with BSkyB was announced, Sir Alan Sugar told The Sunday Times he was planning to turn his attention to his property portfolio, which he deeply regretted not spending more time on in the 'golden' 10 years from the mid-'90s:
“Throughout my career I have invested in property as security and seen the electronics as the risky part of my business. I’ve got £300m of property, mostly in trophy buildings around London, and I don’t owe a penny. If this were leveraged properly it could be £3 billion overnight. I need to put these assets to work, raise equity and become a proper real-estate trader.”
What needs emphasising is the phrase in the middle of that quotation – "If this were leveraged properly…" – because it's imperative that you do your homework and have a solid plan for servicing the debt you'll be taking on, before you rush out and start looking to remortgage your home. It's a simple principle, but not an easy strategy to execute.
By the time he had bought his 6th property, Neil was in a position to be able to employ a property manager, allowing him to spend more time focusing on further acquisitions, incorporating different strategies and developing a diversified portfolio. It also gave him the opportunity to begin helping others, and Neil now mentors numerous clients around the UK, from first-time buyers to established investors. He has also now employed a few staff to support the running of the business which allows him to delegate the tasks he doesn’t enjoy and spend more time on those he does.
As at mid-2010, Neil's portfolio currently stands at over £3m in value, and his properties, together with other related income streams are bringing him an annual gross profit of well over £100,000. Through leveraging other people's time and money, Neil has built a business that makes him nearly four times what he would have been earning in paid employment, and effectively achieved financial independence: he doesn't have to go to work every day to pay the bills.
Leverage enables you to build a business which can essentially run without you, and it means your capital goes further. The more you earn, the more you can invest, and if you’re leveraging correctly, your portfolio of assets will grow exponentially, as you use other people’s money and time to increase your own wealth.
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