How Investors Use Leverage in Real Estate to Build Wealth

Determine the construction and renovation costs required to increase the value of the property and make it habitable and functional.


Real estate investing is a popular way to diversify your investment portfolio. Everywhere we look it reminds us of the benefits of buying real estate. However, just like the stock market, the real estate market and rental prices can go down as well as up. This is why, when building a real estate portfolio, it is essential to use leverage wisely.

What is leverage in real estate

Leverage is a simple real estate investment strategy in which investors borrow money to buy property in order to increase returns. Leverage allows sophisticated investors to build considerable wealth over time by increasing both their return on investment and their purchasing power. It refers to the use of borrowed capital or debt to increase the potential return of an investment. The most common way to leverage your real estate investment is with your own money or through a mortgage.

Leverage works in your favor when real estate values ​​rise, but it can also lead to losses when values ​​fall. Here’s how:

The BRRRR process allows investors to generate passive income over time by profiting from the real estate market.


1. Buy

Buying real estate at a discount is a great way to maximize your return on investment. The key is to buy properties at or below market value and not invest more than 70% of the after repair value of the property in order to have enough equity in the property when seeking finance or sales. Deciding how to finance your property, such as with cash, hard money loan, seller financing or private loans, is part of this process.

2. Renovate

Determine the construction and renovation costs required to increase the value of the property and make it habitable and functional. Second, select the right team to manage the real estate project effectively, efficiently, and most importantly, within budget.

3. Rent

Rental income generates monthly cash flow, which is important for real estate investors. Additionally, lenders are more likely to refinance a property that is rented out to tenants. More importantly, rental income is a great way to pay off your mortgage.

4. Refinance

At the refinancing stage of the BRRRR method, it is essential to conduct thorough research to identify reputable lenders with favorable rates and terms. When researching lenders, it is essential to understand whether banks offer withdrawals or only pay off debt. If they don’t offer cash, you should look for a lender that does. Determine how long you need to own the property before refinancing. For the BRRRR strategy to work, you need to find a lender who will lend near the appraised value.

5. Repeat

If you have mastered the BRRRR method, you have successfully purchased, rehabilitated, rented and refinanced a property. Now is the time to reflect on what you have learned and make any necessary adjustments. You can reimplement the BRRRR method and be more successful in the future by combining reflection and criticism. If you’ve done a good job, you can reinvest the excess profit in a new property.

Conclusion

When the value of property and rent increases over time, leverage works extremely well. However, this is not always the case. Real estate can be heavily impacted by flat or bearish economic cycles or by market conditions that affect a tenant’s ability to pay rent, leaving the investor to make loan repayments or risk losing the asset in due to non-payment. All in all, as an investor, leverage can be used as a key catalyst to increase purchasing power, build wealth, and ultimately enjoy financial freedom through a careful planning and execution.

Written by

Anurag Goel, Director, Goel Ganga Developments.

(CSR India)