Why Leveraged Property Investment Can Mean Higher Returns
Why Leveraged Property Investment Can Mean Higher Returns
Date Published: 26 March 2024
If you’re not in finance, you probably most often hear and see the word “leverage” discussed negatively. News articles about failed investors and companies will no doubt (accurately) list overleverage as one of the reasons for their failure. However, when approached with caution and understanding, leveraged investment can be a powerful tool for growing your wealth. We Kiwis intuitively understand this, as reflected in our love of investment property.
Leveraged investment involves using borrowed money or other financial tools to access an investment opportunity and increase the potential return of an investment. In the case of property investment, investors get a mortgage to buy property.
Here’s why leveraged investment can be a good thing:
Access to property investment opportunities
Real estate investment requires substantial capital. For most of us, a property portfolio is only possible with a mortgage. The more you can borrow, the more buying power you have to leverage your initial investment capital and grow and diversify your portfolio. This expanded investment portfolio can lead to greater income potential and capital gains.
Enhanced returns
You may think that if you’ve leveraged your investment, then surely the mortgage minimises those gains. But while the lender gets a portion of the pie by charging interest rates, and you would have to pay back the capital in the event of a sale, any profit from rents and capital gains would be entirely yours. For capital gains, you especially have the opportunity to get a greater percentage return from your investment.
For instance, consider a scenario where an investor purchases a rental property for $600,000. They pay with a $400,000 mortgage and $200,000 of their own capital. If the property appreciates by 5% in a year, the investor’s $200,000 initial investment would yield a $30,000 return in capital gains. However, since the investor only contributed $200,000 of their own capital, the effective return on investment (ROI) would be 15% ($30,000 return divided by $200,000 initial investment). This illustrates how leveraging can amplify returns and accelerate your wealth growth.
Investment Property Portfolio Diversification
Leveraged investment can allow you to own multiple investment properties. This enables you to diversify your real estate portfolio across different locations and property types. The result reduces your risk and enhances your portfolio’s resilience. Many serious investors choose to invest in a mix of residential, commercial, and industrial properties across multiple geographic regions. This diversification strategy can mitigate the impact of local market fluctuations, providing more stable and consistent returns over the long term.
Tax advantages
From 1 April 2024, landlords can claim 80% of their interest expenses. This will increase to 100% from 1 April 2025. This reduces the investor’s taxable income and alleviates the cost of servicing a mortgage, making property investment more affordable.
So there you have it. Leveraged property investment gives Kiwis access to real estate and can maximise their investment returns, building more wealth over time. However, it’s essential to do due diligence and to understand the numbers before embarking on any leveraged investment. For more information, check out our blogs, How Do I Calculate Yield? and What to Look for When Buying an Investment Property. And, of course, contact one of our mortgage advisers to get mortgage advice specific to you.
