Understanding Real Estate Leverage: Risks & Rewards
Updated: Nov 21
Investing in real estate is all about keeping a good balance between risk and reward. Investors look to maintain this balance with their investment portfolio by diversifying to other areas, property types, and property sizes to attain and maintain wealth in the long run. Keeping the balance between these two factors depends on many external influences, including your risk tolerance as an investor, current market conditions in the area that you’re investing, and impending economic factors. Various financial strategies, utilizing the resources of a qualified realtor and staying on top of your investments, repairs, and upcoming needs with the assistance of a property management company will all contribute to the longevity and success of your portfolio.
In addition to the aforementioned items, you can also utilize strategies like real estate leveraging - but what is that? Throughout the course of this article, we will discuss what real estate leveraging is, how it can benefit you as an investor in Northern Virginia, and what next steps you should consider taking.
Term Explained: Real Estate Leveraging
When you think of the word leverage, what comes to mind? Maybe you have a vision of an old-fashioned scale where two items of the same weight balance out the scale - this can be the same for leveraging. Real estate leveraging is defined as borrowed capital or another form of measurable financial instruments that are used to increase the potential return of a particular real estate investment. For example, to balance out the hypothetical scales, you place your investment property on one side and a mortgage on the other - it balances out. However, it’s not always that cut and dry.
Different Ways Investors Can Leverage
When you are looking to diversify your portfolio, and you begin your search for a new property in, for example, Arlington County, you know that the prices might be higher than what you’re normally looking at. You need to carefully leverage this property in an equal way as possible to keep your portfolio as a whole healthy. Where are you going to borrow the money from to add this potential property to your portfolio? Typically, investors lean towards securing a mortgage, like mentioned above, to leverage, but gaining a mortgage isn’t always possible - then what? Below are some of the many additional options available to investors for real estate leveraging.
Business Credit for Leverage
You might not even realize it, but if you have a good credit score and have a history of being a successful investor, you might be able to qualify for business credit to finance part or all of your new investment. If your credit limit is adequate enough, you might be able to purchase a property outright or even use the credit for the initial down payment. Checking with your credit lender first to ensure this is a viable option is always a good first step. This quick financing option could be of huge benefit when purchasing an investment property in competitive places like Loudoun County.
Home Equity Loans
If you already own another property as your primary residence or a separate investment property, you might be able to secure a home equity loan or a HELOC to help you purchase your next investment property. The HELOC is similar to a credit card, where you use your home or other property as collateral against the new property in a similar fashion where you use your credit score and good faith as collateral for a credit card. The HELOC is like a second mortgage where you have a fixed sum to repay over a certain period of time. To stay on top of your investments when they reach this level, you might want to consider hiring a property management company to help keep your investments in good shape.
Investors also have the option of using the services of a portfolio lender. Portfolio lenders belong to small financial institutions with less strict underwriting guidelines than larger banks or credit unions. They are more flexible but often charge a much higher rate.
Risks and Benefits of Real Estate Leveraging
You might be asking yourself, why should I consider leveraging to grow my portfolio? Below are some of the many benefits you, as an investor, can receive when participating in real estate leveraging.
Have an opportunity to grow your portfolio at a rapid rate
Earn more money and build generational wealth with a larger portfolio
Protect yourself and your investments against inflation
Achieve financial freedom faster
All of that sounds great, right? But what are the drawbacks of real estate leveraging?
A higher prices leverage means higher risk with more potential for failure
You might not see a return on your investment for quite some time
You might lose assets if you can’t make your monthly payments which can be a domino effect with larger portfolios
The market could swing, and your property values could plummet
Taking into consideration both the positives and negatives of real estate, leveraging both your portfolio and the current market can help you decide if this is the right option for you. As always, speak with trusted local professionals and financial advisors who have experience in dealing with portfolios that are similar to yours. Their guidance and expertise will prove to be invaluable as you grow your portfolio in Northern Virginia.
Building a driven and experienced team to help you maintain and care for your properties is also vital. How can you do this? One great thing to consider is how you will maintain each property once your portfolio grows. Working with a property management company can offer you the solution you are looking for.
Promax Management, located in Northern Virginia, has years of experience working with investors and their portfolios. As investors themselves, they understand what kind of service you are looking for and establish standards for you to expect. They have the knowledge and experience to effectively manage your property and maximize your overall returns with swift and cost-effective solutions.