The real life use of leverage
Brett Alegre-WoodChairman, YPC Group
Is it better to borrow the maximum mortgage available or to limit the amount of your mortgage so that the property is cashflow positive?
Let's take a look two real life examples of one of our clients. They were concerned that the property was cashflow negative and that they would be better to borrow only enough to make the deal cashflow positive.
Here is what I wrote in response to the client's concerns.
OPTION 1 - BORROW LESS - CASHFLOW NEUTRAL
You need to stay educated...
Grab my FREE weekly property mastery e-newsletter and learn the very same information many have paid thousands to learn. It's valued at £199 per year and each week, I'll teach you everything I've learned while building the portfolios of thousands of my clients over the last 15 years. Learn from my experience and avoid making the mistakes I did!
You'll learn all this and more in just the first 3 weeks of this newsletter:
 Plus, a special bonus: you'll receive Brett's regular video updates, delivered straight into your inbox, where he turns on his video camera and decodes the week's property news for you!
|
Join our newsletter list for FREE today and you'll receive as a bonus a complimentary copy of Brett Alegre-Wood's best-selling book The 3+1 Plan!
You'll learn the safest time-proven strategies that will guide you and grow your portfolio during any economic boom, bust, recession or downturn.The 3+1 Plan is a step-by-step guide that will show you how, with just four properties, you will be able to fund the lifestyle you have always wanted. Even before you retire! Immediately you register for our newsletter we'll send you the PDF download link for this award-winning book so you can start reading right away...
| ||||||||||||
| |||||||||||||
PROPERTY 1
Purchase Price- £189950
Mortgage for netural - £123820
Input on Completion - £38295
This will allow you make a profit each month big enough to pay for the ground rent and service charges each month.
PROPERTY 2
Purchase Price - £169950
Mortgage for neutral - £110112.35
Input on Completion - £30,946.15
PROPERTY 3
Purchase Price - £182500
Mortgage for neutral - £149,888
Input on Completion - £7062
Total input on completion for 3 properties - £76,303.15
versus
OPTION 2 - BORROW MORE - CASHFLOW NEGATIVE
Using the same properties as above your total input considering my 2 Year Cashflow Rule would be £19077.50 Consider this is the figure you would need to put away for the 3 properties to last you a full 2 years.
The difference between both options is - £57,225.65
If you are concerned that property won't rise in 2 years then consider 3 years. 3 years would be £28,616 and 5 years is £47,693. I think you would agree that after 5 years the property would have increased in value enough to remortgage it and also the rents would have gone up enough to do it. This is still less that the £76,000 you are planning on putting in initially.
You could actually fully cashflow for a full 8 years for the same money. Surely after 8 years you would agree that the property would be ripe for remortgage or selling and you would have made huge money in appreciation.
This is the difference without considering how much you are losing in the additional properties that you will not be able to buy cannot buy as your capital is tied up in the existing properties.
You however may have the ability to remortgage and take out money sooner with the first option but this is unlikely due to rental figures.
Try to get your head around these figures, I know it is hard to understand how borrowing more is actually better but that is the way it works. We call this leverage and it is based on the prinicple of OPT/OPM or Other Peoples Time and Other People Money - You use both to your advantage to make money in life. The more OPM you have working for you the better as long as you are within your cashflows which you are well within.
Live with passion,
Brett Wood
PS. I realise this is an oversimplification of the actual maths but the principle holds true, it is the reason I always go for the biggest mortgage under any conditions, as I understand the concept of Leverage.
Reader comments for the article 'The real life use of leverage'
You're invited to join in the discussion of this article. Do you have advice to share? An opinion or some feedback that adds to the discussion? Feel free to add it below! (Please note though that ALL comments are checked before they're posted.)
Brett reporting from Malaysia, should we open up an office in Malaysia?
How will the Euro affect you as an investor?
Is it realistic to have cashflow positive investment property 100% of the time?
How Much Capital Do You Need To Get Started In Property Investment?
How Quickly Should An Investor Build Their Property Portfolio?
Brett reveals London's newest, still-unknown hotspots in new video