One of the most heard terms in Real Estate you hear is leverage. Leverage, if used correctly, allows give you the borrower more flexibility to use your money to its highest potential.
What is leverage in Real Estate?
Leverage: the available equity of a single real estate asset. To calculate equity, take into account the current market value of your property and the loan to value available. Leverage works to your advantage when real estate values rise, but it can also lead to losses if values decline.
Looking to purchase your primary residence?:
- How long do you plan on living in the home? Most families tend to move within 5-7 years, try to keep in mind life events such as career paths, raising a family, getting married, etc.
- Do you want to buy a bigger home, and can you afford a bigger house?
- Do you need to downsize? Kids have moved out, so you don’t need as much space.
There are plenty of reasons, quite a few of them are financially related, and others lie outside the box and come as a surprise. Ultimately your leverage will be based on how you can afford.
For the investors looking to rent to tenants:
Leverage for investment properties is simpler to determine because it is based on acquisition or refinancing and anticipated rents. Ideally, take into account; short, medium, and long term goals for the property. The easiest way to factor will be to determine how much money you would like to make per month, minus all of your expenses.
For example:
You are offered a loan at $300,000 and $400,000 (highest leverage)at a 4% payment of $1,432.25 and $1,909.66 (respectively). You will have to find a renter to pay your mortgage plus expenses and how much you want to make in profit.
When deciding leverage for an investment property, try to make your best financial decision, trying to maximize profits while taking into account sunk and variable cost. Ensure there are enough reserves to pay for any expenses, maintenance to the property, tenants not paying, even emergency use of funds.
For the investors looking to fix and flip (rehab a property to sell later):
Leverage for fix and flips; a very advanced strategy used by investors, should take into account the sale of the property in a future market. Most investors will push for max leverage, and private money lenders do allow for rehab funds in the loan.
Before purchasing, calculate total finance cost, and this will include the number of monthly payments made (how long it took you to finish the sell the property). Always try to be in the green before you decide to purchase the property. Lastly, understand that having cash on hand helps you when things go wrong.
Please give me a call if you have any questions and we look forward to the opportunity to serve you!
Valor Lending Group also offers literally every loan in the book! Please do not hesitate to call on me for any scenarios. I look forward to an opportunity to demonstrate my prompt and professional service.
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