Big investments can create big returns.
However, could you be harming your potential revenue stream by purchasing a property outright. If you are serious about investing, then leveraging your money can give your income the boost it needs.
Put simply, leveraging is using other people’s money to make money for yourself.
Leveraging is often used to help diversify your property portfolio in order to help manage and reduce risk.
You are essentially reducing your overall risk by taking on more properties and therefore more tenants. Having more tenants means you do not have all your eggs in one basket and should one of your tenant’s face difficulties paying their rent, you have the remaining tenants as a safety net to reduce the risk of losses. You can diversify your income by spreading your total investment over a number of properties and use bank mortgages to cover the remaining funds.
By utilising money provided by banks you are reducing your overall risk should the market values change.
Diversifying your properties acts as an income buffer, preventing unexpected changes from impacting your whole revenue stream.
For example, by investing £200,000 in a single property - you could own 100% of the property. Alternatively, you could use the same money to acquire five properties with individual valuations of £200,000 each, with a 20% deposit per property, using bank mortgages to fund the remaining 80% on each property. Therefore £200,000 is spread over five properties which helps to minimise your risk. If one property value changes it will have a much smaller impact on your total investment.
Whilst a new investor would likely consider the single property to be a better option, it is often found to be a much riskier investment. If your single property remains unoccupied then you will have no rental income, however if one of your five properties are unoccupied then you will still have 80% of your rental income to fall back on.
(I hear you ask – but what if all five properties are unoccupied, what then? That’s where due diligence and CDPG come in, but that’s for a later post.)
By using leverage, you can diversify your income and reduce risk factors, selecting properties carefully in order to help secure your investment against unexpected pitfalls.
You may think that owning 100% of a property is a good investment opportunity, to allow you to have no mortgages and associated interest rates, however knowing how to leverage your money in different properties is important in order to balance all associated risk factors to ensure a stable income stream.
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