The World Of Leverage

No matter what market you are investing in across Canada, the principal of leverage (WHEN APPLIED TO THE RIGHT INVESTMENT PROPERTIES), has worked extremely well in recent years. Although there are many benefits, the primary ones remain –

• Can significantly enhance the ROI of the property
• Allows you to acquire additional properties & build a portfolio faster

Our definition for LEVERAGE remains the same – ‘the use of borrowed money to increase the return on an investment property’. It is considered a legitimate investment strategy, and one that is best suited for properties with both good cash flows and those having a good probability of future appreciation.

Source: Resi

A simple illustration highlights the concept in a growth market:

1. NO FINANCING – STRAIGHT CASH PURCHASE

Purchase Price $200,000 (all cash investment)
Market Growth Projection – 3% per year
After Year 2 - $212,000
ROI – 6% (on cash invested)

2. 70% FINANCING – 1ST MORTGAGE OF $140,000

Purchase Price $200,000
Cash Investment $60,000
After Year 2 - $212,000
ROI – 20% (on cash invested)

Again, this is an illustration which is based on strictly price appreciation. There is no analysis of the property’s monthly/annual cash flow, which would typically come first. If in fact the property was actually sold after year 2, the total ROI would be even more in favour of Scenario 2, and the % difference greater.

On the matter of building a portfolio of properties faster, you can see by allocating $60,000 by property, you should be able to acquire ‘3 properties’ by leveraging your cash investment. The key is to work this strategy on the RIGHT INVESTMENT PROPERTIES.

Does leverage still work in a flat market (no growth)? Or a declining market (negative growth)? Tell us your stories, we’d love to hear them - both positive and negative. Call us anytime regarding our home turf here in Windsor –Essex!

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Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434