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Property Investing and Leverage

One can leverage lots of things: people, systems, banks etc The latter is what interest me when speaking about property.

If you want to invest in property, it will be easy – a manner of speech – to raise finance against it. Banks are usually willing to lend you more than what you will put into the property yourself. If we are talking about a residential mortgage then the bank will lend you up to 95% in the current financial market depending on your credit worthiness.

If you ask a bank to lend you money so that you can invest in the stock market, you will see your bank manager become very red in the face – also a figure of speech as it is generally done online nowadays. if you want to invest in BTL (buy to let) properties then this amount lent will be lower but you can still get up to 80% of the market value of the property, which is really not bad at all.

So, you put down a deposit and the bank will lend you money through the means of a mortgage secured on the property you are buying generally. This is very powerful and in fact magical because as property prices increase with time, you benefit not only on a rise in the amount of equity you have in the house (your deposit) but also on the total amount of the house. This is especially true for interest only mortgages: lets take an example here: Sylvia wants to buy an investment property with a market value of £100,000; she put a deposit down of £20,000 and the bank lends her the rest i.e. £80,000 at an interest rate, which is currently around the 5 to 6%. As time goes by, house prices go up generally and usually by more than the inflation rate. For the last 50 years prices have doubled every 7 to 10 years. lets assume that Sylvia rents out her property to a tenant, who will pay her mortgage and give her on top of that a bit of profit every month for simplicity’s sake.

This same property will double in value in the next 10 years. This is the magical bit: If in year 1, her property goes up by 10% to £110,000, this means that she will have increased her equity in the house by 50% – she only put £20,000 towards the total purchase price! In year 2, assuming prices have increased again to £120,000, she has now doubled her original deposit. in other words, she has made 100% profit on her original amount: not bad really for a few hours work upfront to set it all up and find a good tenant! For me this is the magic of property investing!

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