How Much Leverage is safe?
– Aman Azad, C.E.O. Azad Real Estate Group Ltd.
Using Leverage Wisely
To ensure that leverage is working for you rather than against you, keep these tips in mind:
• Be conservative in your appreciation expectation. Just because property values and rents have increased 5% annually in your target area in recent years doesn’t necessarily mean they will this year or in the years ahead. It’s much safer to build your financial strategy around a slightly lower expectation and then be pleasantly surprised if returns are higher than you anticipated.
•Get a payment you can live with. The idea of acquiring a single-family property with little down can be appealing, but the higher monthly obligation can become a problem down the road, especially if you have a month or two of unexpected vacancy. It is important to find the right balance between your down payment and your monthly payment.
• Keep your focus on cash flow. With the purchase of rental properties, the particulars of the transaction are important. However, so is the ongoing operation of the property. Can you keep the home occupied and at a rent that covers your costs? The answers to both questions must be yes if you are to turn a profit.
Used properly, leverage is one of the best ways to increase your real estate net worth. And, thankfully, new investors don’t have to go it alone. There are many resources available for learning more about investing and many experts who can help you get your feet wet while minimizing your risk. Then, equipped with properties that are providing positive cash flow and a better understanding of the business, you can begin taking greater advantage of leverage to expand your portfolio.