Real Estate Investor Magazine South Africa March/April 2020 | Page 28

INVESTOR INTELLIGENCE
Strategic property
investment
Use borrowed capital to make great financial returns
What is the meaning of leverage?
Leverage results from using borrowed capital as a funding
source when investing to expand your asset base and generate
returns on risk capital. Leverage is an investment strategy
of using borrowed money. It’s the use of various financial
instruments or borrowed capital to increase the potential
return of an investment. Assuming the same 5% rate of appreciation, the buyer's net
worth from the purchase on an all-cash R500,000 purchase,
the property would increase by R25,000 over the course
of 12 months, versus R25,000 return on a R 100,000 cash
contribution which excludes cost for gearing. Thus, with the
same returns but a huge difference on the percentage of
“CASH ON CASH” ROI, which demonstrates the potential net
Example of Leveraging
Consider the common real estate purchase requirement of a
20% down payment. That's R100,000 on a R500,000 property.
By putting down only 20% of the money down and borrowing
the rest, the buyer essentially uses a relatively small percentage
of his or her own funds to make the purchase. The majority,
therefore, is provided by a lender/bank. That's why real estate
investors often refer to the remaining 80% of the purchase
price as other people's money. worth increase provided through the use of leverage. Now,
picture the percentage gain every year for 20 years. Over time,
the use of leverage can have a very significant and very positive
impact on your net worth.
Assuming that the property appreciates at a rate of 5% per
year. This means the borrower's net worth grows to R525,000
in just 12 months. Comparing this gain to the gain from a
purchase made outright (at R500 000) without any loan,
highlights the value of the leveraging strategy.
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MARCH/APRIL 2020 SA Real Estate Investor Magazine
Other examples of businesses which are known and use
leveraging assets are, Uber using other people’s vehicles, Airbnb
leveraging other people’s properties for accommodation,
Property Assist using other people’s properties to make social
and financial impact whilst making solid returns.
Visit the Property Assist website www.propertyassist.co.za
and register with Wealth Assist in four easy steps and start
making your first measurable impact property investment.
SOURCE Property Assist