Property value is a fantastic way to get into real estate without having to sell the current property you own. Instead, leverage allows you to use borrowed money to increase the return you’ll get on an investment. This gives you the chance to purchase a property that’s worth far more than you could do otherwise and allows you to spread your investments out further.
How do you ensure you’re getting enough leverage for the property you’re working on? Here’s everything you need to know.
Look At What Your Property Is Worth
How much is your property currently worth? You’ll need three numbers, current worth, the cost when you bought it, and how much your improvements will add. Don’t overstate or try to get away with borrowing more than you need since this can quickly sink your business and land you in hot legal.
Loan to Cost vs. Loan to Value
The loan-to-cost method of lending allows your lenders to finance the cost of your property. This is the most common type and is extremely simple.
Loan to value, on the other hand, can be found by dividing how much your mortgage is by the current value of your property. This is great in times when you’ve paid to rehab a property. The leverage is then based on the after-repair value, which often allows for far more money to be lent, which in turn ensures that you can complete the job exactly how you envisioned without being held back by funding.
Why Leverage At All?
Although you may have lofty dreams when you first get into real estate, it’s an expensive industry that can quickly leave you worn out and without a cent to your name, even if you’re careful. Because of this, the larger lender, with more skilled eyes on it, ensures that you’ll have the backing of people who have done this before, which will allow you to both do more work, and be more sure about the work you do.
Having more funding also ensures that you can do more work in cities, which is more predictable than investing in rural areas, where there’s no clear sign when a site will take off or when it’s going to flop.
How Does Leverage Turn Out?
When you’re asking yourself, ‘what is my home worth‘ it’s important that you know there’s no straight answer on that until it’s completed. It has its downsides, like if you include a low down payment on your leverage loan: you could be facing steep monthly payments that will drive you wild unless you can get that property completed and sold as soon as possible.
Plenty of Real Estate Offers Major Gains
Whether you’re flipping houses or building multi-family buildings for scratch, the real estate market has been wild since early 2020 and is expected to continue on this trajectory for many more years to come. Pay attention to which deals you’re going in on, and only work with leverage when you’re completely sure about a plan coming to fruition.