Are you an investor wanting to increase your net worth? According to a recent article by The Guardian, the Australian Taxation Office stated that more than 7 percent of property investors – or 215 321 people – account for 25% of all property investments in Australia. This data shows how much easier it is to increase an investment portfolio than to enter the housing market.
With this in mind, using real estate as leverage is a traditional way to increase your investment portfolio and generate more cash flow streams.
Refinancing a property using a deposit (or “deposit”) can be an effective strategy to help you build wealth. So, what do you need to look out for when leveraging as a high-net-worth individual? This article will explore the benefits of real estate investing for your portfolio and how to balance risk and reward.
What is Real Estate Leverage?
Leveraging real estate involves borrowing money to use as an investment. This can include combining a deposit with debt, increasing your returns over the long term. As an investor, using debt plus a small amount of equity as a deposit is an excellent technique, provided competitive loan rates (interest rates) can be obtained relative to the anticipated rental yield (income) combined with anticipated capital appreciation over time.
However, like the stock market, real estate values rise and fall over time. When risking leverage, a higher deposit helps avoid negative monthly cash flow rental yields decline; similarly, if property values decline, the mortgage exceeds the property value, vacancy rates increase, or rent prices decrease.
If you have made a 25% deposit on a rental home, an investor collects 100% of the rental income, profits from the increase in equity, along with increased net cash flow.
Types of Real Estate Leverage
As a high-net-worth individual, you can use different types of leverage. Although it is common for investors to choose a mortgage, let’s take a look at other leveraging avenues you can explore for potential returns.
Mortgages: As a common type of real estate leveraging, this requires a deposit, and the borrower pays back the loan over time with interest. This is a “plain vanilla” strategy and is commonly used.
Commercial Real Estate: Leveraging commercial real estate involves loans designed for income-generating properties, such as retail, offices, or industrial complexes. In comparison to residential mortgages, these loans have different structures and terms.
Vendor (“Seller”) Financing: In this case, a vendor provides financing to the buyer, and payments are made directly to the vendor for an agreed-upon period.
Hard Money Loans: These loans are secured by the property's price as short-term, asset-based leveraging. Although it is an excellent way to invest in property more quickly, it will usually come with higher interest rates and significantly shorter repayment timeframes (when compared to a “plain vanilla” mortgage).
Cross-Collateralisation: This strategy combines equity across different assets (properties) to fund a new investment property by using those multiple properties to finance a single loan.
Home Equity Loans: If you already own a property or have only a small amount of debt attached to that home, you can leverage this equity by taking out a Home Equity Loan or Home Equity Line of Credit (up to certain limits) to apply those new borrowed funds towards a property purchase.
Real Estate Partnerships: Another form of leverage is real estate partnerships. In this case, multiple individuals contribute capital, allowing investors to access more considerable real estate opportunities. This strategy often involves creating new legal structures for the purchase to maximise tax efficiencies and, more importantly, to protect all investors.
Private Lending: Funds can be leveraged from private lenders and have more flexible arrangements than traditional mortgages. However, these lenders have higher interest rates. They may impose stricter terms and conditions, so always ask a mortgage broker which investment lending options might best suit your portfolio needs.
Why Leverage Your Real Estate Net Worth?
Real estate investments have many advantages, and there is much to note!
Increase Returns: Leveraging your returns can potentially boost your return on investment (ROI). If a property appreciates, your returns on the total asset can be higher than if you had used your funds. Leverage can also increase risk, so this must also be considered before embarking on this strategy option
Portfolio Diversity: Leveraging provides an opportunity to diversify your portfolio. Spreading your investments across multiple properties (and, indeed, asset classes) instead of tying your capital into just one asset can help mitigate risk and reduce the financial impacts of holding a single property if it – or the broader market in general – were to go down in value.
Tax Advantages: Investment loans, when used to produce assessable income, often attract tax-deductible interest payments, which may increase your after-tax returns. Asset depreciation may also provide investors with tax deductions. As always, you should speak with your tax adviser/agent to learn more about these tax issues.
Strategic Debt: By securing loans with low-interest rates, you can leverage your net worth whilst mitigating risk. This way, you can easily manage your financial strategy, knowing that you are leveraging your wealth for additional growth whilst reducing downside market risk
Inflation Benefit: If your property rises in value, you benefit from this appreciation and can protect your wealth, simultaneously appreciating your capital and potentially benefiting from increased rental yields over time (“income”).
Scale Quicker: Suppose you want to grow your real estate property portfolio faster. Instead of buying one property outright, you can purchase multiple properties - using debt leverage - and accumulate greater wealth over time.
When considering leveraging real estate investments, you need to assess risk tolerance, the lender's financial terms, and how to put forth a strategy. At Dominium Capital, our qualified financial advisors service Richmond, Brunswick, and St Kilda residents looking to build wealth with reliable real estate market knowledge.
Defining Your Real Estate Net Worth
Before considering leveraging your net worth, it is crucial to understand what you have and how to use it to your advantage in the property market. So, what do you need to consider?
Calculating Your Home Equity
What is the current market value of your property? For example, if your property is worth $2,000,000, your outstanding mortgage is $600,000, and your equity is $1,400,000. Speak to an expert for a comparative market analysis, professional appraisal, or researching listed or sold properties in your area.
Subtract any outstanding mortgage debt. Subtract the remaining balance on your mortgage from the property's market value. This gives you the home equity you own.
Consider other liabilities. Consider these if you have debts secured by your home, such as a home equity loan.
Calculating Investment Property Equity
Get a property valuation. For each investment property that you own, assess its market value. This can be done with competitive market analysis, appraisals, and recent sales data.
Cut out outstanding mortgage debt. With each investment property, subtract the remaining mortgage debt from its market value. This way, you can gauge the equity you have in each property.
Make a note of additional debts. Do you have any other loans or debts with investment properties? If you have commercial loans or lines of credit, subtract this from your calculated equity. If in doubt, always speak to a qualified and experienced mortgage broker.
Calculating the Value of Your Rental Properties
Obtain a rental income assessment or simply use your leasing agent’s statements to confirm rental income receipts. Calculate the current and potential rental income of your invested properties. Always consider market rental rates, occupancy rates, and additional income streams such as laundry or parking facilities.
Operating expenses. How much does it cost to operate? This could include property management fees, maintenance expenses, property taxes, and insurance.
Cap Rate Calculation. Real estate investors must calculate the capitalisation rate for each rental property. Divide the net operating income (NOI) by the current market value. This gives you an idea of what to expect regarding a return on investment.
Whether as a homeowner or an investor, increasing your real estate net worth involves careful strategy.
Property appreciation strategy
As real estate investors, stay informed on market trends. Monitoring local real estate trends - such as economic indicators - allows you to decide when to buy, sell, or upgrade. If you need help navigating the real estate market, consult with professionals experienced in the financial & real estate market landscape.
Invest in high-growth areas. Which suburbs have a high probability of growing in appreciation? If there is potential for infrastructure development, population growth, or job opportunities, your real estate will likely increase in value if these factors come to fruition.
Optimise rental income
Conduct market research to set realistic and competitive rental prices. This way, you can attract quality tenants who contribute to your properties, generating rental income that works for you.
Regular property maintenance. Always keep your properties well-maintained for tenants. Not only does a clean property retain its value, but it allows you to demand higher rental rates.
Upgrade and renovate
Invest in renovations that add value, such as kitchen upgrades, energy-efficient improvements, or landscaping.
Time your upgrades. If you renovate your home before selling, this can boost the sale price or rental rate. Speak with your tax adviser/agent about the tax benefits of completing renovations and/or repairs to your investment properties.
Diversification and risk management
Invest across different types of property, such as commercial, residential, and industrial property, for more stable, long-term returns.
Identify and stay abreast of market shifts. Adapt to market changes or economic modifications for a resilient real estate strategy that benefits you.
Are you a professional or business owner wanting to optimise your finances? As a financial advisor servicing Melbourne and Sydney areas, we can give you economic confidence with your real estate leverage loan payments.
Build Your Freedom - Financial Advisor in Melbourne
Whether you're experienced in real estate investing or are interested in the real estate landscape, leveraging your assets is a great way to grow them.
At Dominium Capital, we understand the need to live on your terms. If you require support on cash returns, purchase price, loan payments, or mortgage payments, our solutionshelp you secure the best investment strategy.
Applying proven strategies for private wealth clients, we help you secure your financial future and work with you for the long term. After all, building wealth is about freedom, not money.
General Advice Warning: This article does not consider your personal circumstances and is general advice only – unless otherwise stated.
You should not act on any recommendation without considering your personal needs, circumstances and objectives. Dominium Capital recommends you obtain professional financial advice specific to your circumstances.
Any general financial advice is provided by Dominium Capital Financial Advisers Pty Ltd, a Corporate Authorised Representative of Dominium Capital Pty Limited ACN 142 188 510 125 AFSL 461653
Disclaimers 1. Any financial advice is provided by Dominium Capital Financial Advisers Pty Ltd, an Authorised Representatives of Dominium Capital Pty Limited (ABN 54 513 176) 674 AFSL 461653 2. Any credit & finance advice is provided by Dominium Capital Pty Ltd. Australian Credit Licence 461653 3. General Advice Warning – The information provided is general advice only. It has been prepared without taking into account any of your individual objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs.