FOCUS ON: Property Leveraging

Just as a lever allows someone to expend the same force and achieve a greater result, so does the property investor who uses leveraging achieve a greater return on investment for the same cash.

A leverage-based off-plan investment provides control of a tangible asset worth much more than the initial capital outlay, not the case for investors of traditional investment vehicles. Whilst leveraging is prevalent within the currencies and commodities markets, the risk exposure associated with the usage of leveraging in these investment types for small-scale investors is such that it does not represent a low-risk investment vehicle.

When purchasing a property with cash that costs £100,000 and presuming a growth of only 20% (therefore generating £20,000 cash profit) the investor receives 20% profit and turns £100,000 into £120,000. However, when purchasing the same property using a leveraged approach only £20,000 cash as a deposit is required and also using a 80% ‘Loan To Value’ mortgage (presuming the same growth) the investor receives 100% profit and turns £20,000 into £40,000.

However, leveraging is not wholly dependent upon investors using mortgages to achieve leverage. Locating and purchasing property under market value (inherent profit) has the same leveraging effect without the need to arrange a mortgage facility, nor the need to make mortgage payments.