Use financial leverage to invest in real estate: Should or should not?

Should financial leverage in real estate investment be used, and how to use it to make quick and safe profits? Let Rever explore this issue through the article below.

Real estate tycoon Brandon Turner once said on Forbes: “Effective use of mortgage bank loans for rent is like buying a super value property without actually paying anything for it all. Therefore, they are super-profits. ”

Listen to this is a great idea for those who do not money but passionate to get rich from real estate investment. But is it as beautiful as Mr. Brandon Turner has said? In this article, let’s take a look at some of the potential and challenges of using financial leverage in real estate investing, considering the possibility of whether or not this method should be used.

Typical examples of leverage in real estate investment

In fact, it has been shown that many real estate investors have made extensive use of financial leverage to invest in real estate, and they are very successful. Having an investor with a strategic vision and rational calculations will bring them great profits.

For example: Anh An (living in District 5) invested to buy a apartment is about to complete in District 2 with preferential price about VND1.8 billion and 20% advance payment (VND360 million). With preferential policies from banks, Mr An was able to borrow money easily. The remaining amount will be paid gradually after the apartment is handed over. During the completion of the apartment, Mr. An resold the apartment for 2.5 billion (completed house price), after selling his house, Mr. An collected about VND 700 million minus the VND 400 million loan and the other expenses.It is  easy for Mr. A to give VND200 – 250 million.

Be careful when using financial leverage in real estate investment

Be careful when using financial leverage in real estate investment

The example given above is just one of the cases of using financial leverage in real estate investment. In fact, this activity took place quite exciting, especially in the real estate phase we have many changes as today.

The benefits and risks of using financial leverage in real estate investment

On the benefits of financial leverage in real estate investment

Cash flow optimization: Loans are a way for many investors to balance their net cash flows. For real estate loans, where many investors create a steady cash flow from leasing, the payment and liquidity risk is transferred to tenants. The ability to optimize the cash flow of real estate loans is the same as the way real estate expert Brandon Turner said in a Forbes post: “Effective use of mortgage loans for rent also It’s like buying a super-value property that does not really pay for it. So, they are super-profitable. ”

Reduce Opportunity Costs and Liquidity Risk: Strong spending and “freezing” large amounts of capital into apartments is a personal financial barrier that makes many homebuyers afraid. In many ways reducing opportunity costs and optimizing capital mobility, installment loans are the most feasible and feasible option. For individual investors, by splitting the cash flow and carefully lengthening the repayment period from large loans into regular installments, the borrower can minimize the liquidity risk to the lowest possible level. enough time to arrange finances. In the long term, investors can turn to other investment alternatives to generate more profit instead of just “capital” confiscated in this particular type of asset.

Using financial leverage helps homeowners reduce their opportunity costs and liquidity risk

Using financial leverage helps homeowners reduce their opportunity costs and liquidity risk

Active in the face of market volatility: The real estate market is always a strong market, where the ability to quickly turn to the market is a prerequisite for success. Financial leverage is always favored by its feasibility and speed. This can be seen in the Vietnamese market. In the season-after-year real estate season, mortgage loans with simplified loan procedures are the key to boosting successful transactions. In fact, mortgage loans are allowing homebuyers to “swing” between 60-80% of real estate values ​​quite quickly when the review and disbursement period is only 1-3 days. Not only fast, using financial leverage to buy real estate is easy to implement when the subject of the mortgage application is always quite wide by the total loan capital “crisis” from the major commercial banks.

Opportunity to enjoy preferential rates when using financial leverage to buy a house

Opportunity to enjoy preferential rates when using financial leverage to buy a house

Specifically, as in the BIDV homebuyer loan package, customers can choose between several loan packages: 7% per annum for the first 6 months, 7.5% per annum for the first 12 months or only from 8.8% per annum applied in the first 24 months since the first disbursement.

More efficient personal finance management: Installment loans help to manage personal finances more efficiently, a plus that comes from the combination of these four advantages. Buyers are more active in managing cash flow, reducing risks and costs, and lowering interest rates. Not only that, Vietnamese investors also benefit from the financial management tools provided by the creditors.

The risks and limitations of financial leverage in real estate investment

Using leverage financial real estate business although bring great profit, but they still have many risks that real estate investors should know:

Double-edged sword: The most important factor in the use of financial leverage is quick-paced wins. In cases where investors err on the side of real estate investment, the sale of the real property will cause a halt in capital and interest rates. For investors without fixed capital, this will be the end of their real estate business.

Danger if you do not know how to choose a loan: For homeowners based on financial leverage, choosing a financial loan is critical to determining the 50% success of the deal. This is because the real estate lending rates offered by banks are very high at between 7-11%, much higher than conventional loans. On the other hand, each bank has preferential lending policies such as (FDI, ODA …). The lack of knowledge and not take advantage of these loans also cause your profit is reduced or the risk increases. than.

Real estate market fluctuations: Can see the real estate market in our country is more volatile, causing the price of housing to fluctuate. These fluctuations have a certain impact on financial leverage when borrowing land. In the case of falling housing prices or freezes, the leverage method is completely counterproductive.

It can be said that using leverage in real estate business for profit is a new and daring form. This method, there are intertwined effects on the real estate market in our country. On the one hand, there are many new real estate giants, on the other hand, making the business situation, buying and selling of land become increasingly unstable and difficult to control. Investors should carefully consider before deciding to use this method to invest in real estate to get rich.

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