What is leverage in real estate?
Leverage is a financial mechanism that allows one to invest by borrowing money rather than only mobilizing their own capital. In real estate, this means that the bank lends money to purchase a rental property, and this property then generates income (rents) that help to repay the loan. It is one of the few areas where the bank agrees to finance the purchase of an asset that partially or fully self-finances through the income it generates.
Simply put, leverage allows you to invest an amount greater than your available liquidity.
If you only have €15,000 available today, but you can borrow €150,000, you will invest €175,000 at 4%. However, if you had not taken your bank loan, you would only have been able to invest €15,000; even at 10% annually, you would not have the same wealth in 20 years.
Can everyone benefit from leverage?
You can benefit from leverage as long as you can borrow from the bank. Of course, the more you can borrow compared to your own contribution, the more you will benefit from leverage.
We invite you to read our article on the negotiation of your mortgage loan to make the most of this leverage.
Should my rental income be higher than my monthly payment?
This question actually answers: should you have positive cash flow to fully benefit from leverage?
And the answer is no! If you have positive cash flow from your operation that's great, but what do you do with that excess money? If you spend it, then it’s uninvested money, and you no longer benefit from leverage. If you were to invest it, then you need to ensure that you have a return higher than the return on your apartment.
This may seem very counterintuitive, but ultimately positive cash flow is very good news for your portfolio, because it's money invested!
Ultimately, to fully benefit from leverage, you need the lowest possible equity contribution, and a rent paid by your tenant that does not exceed much (or at all) your monthly payment!
We invite you to carry out your RCI simulation in order to understand how leverage materializes in your project.
Also discover
