How to use financial leverage in real estate investment?

Financial leverage – a term that may be too familiar to long-term real estate investors, but it is not easy to successfully apply this leverage method to “money generates money”.

The reality now shows that many real estate investors are successfully applying the financial leverage method to invest in real estate. The key to this approach is the rational calculation of each investment stage and the proper loan selection.

Example: A customer named Binh buys to invest in an upcoming apartment in District 9 with a preferential sale price of VND 1.8 billion and only pays 20% in advance (equivalent to VND 360 million). With the preferential loan policy from the project guarantee bank, Mr. Binh can easily borrow this amount. The remaining amount will be paid off gradually after the apartment is handed over. During the apartment’s completion phase, Mr. Binh sold the apartment for 2.5 billion VND (total house price). After selling the house, Binh earned 700 million VND minus the loan. VND 400 million and other expenses, Mr. Binh quickly pocketed VND 200-250 million.

The example that Realestatevietnam has given above is just one of the few cases of using financial leverage in real estate investment. This method is used quite commonly, especially in the current period when our country’s real estate is still volatile.

Benefits and risks when applying the financial leverage method in real estate investment

About benefits:

1.Benefit one: Optimized cash flow: The fact that home loans are a way for investors to balance their net cash flow. For a real estate loan villa thao dien for rent, where many investors create a steady stream of money from leasing, the payment and liquidity risk pass to the tenant. You can summarize the ability to optimize the cash flow of real estate loans as real estate expert Brandon Turner said in a Forbes post, “Efficient use of installment loans to rent .” It’s like buying a super-valuable asset without actually paying anything for it. Therefore, they are super profitable missions”.

2.The second benefit: Be proactive in the market’s volatility.

The real estate market is always a place where many strong fluctuations happen. The ability to quickly rotate capital to catch the market is the prerequisite for successful investment. The financial leverage method is therefore favored for its feasibility and speed. During the end of the year real estate season, installment loans with fast and uncomplicated loan procedures are the driving force behind the surge in successful transactions. Installment loans allow homebuyers to “turn” 60-80% of the value of real estate quickly when the review and disbursement time is just a few days. Not only fast, using financial leverage in real estate is easy to implement when the application object of home loans is always quite large because the total loan capital is “huge” from large commercial banks.

Using financial leverage helps homebuyers reduce opportunity costs and liquidity risks.

3.The third benefit: The opportunity to enjoy preferential interest rates.

An advantage that cannot be ignored when borrowing money to buy a home is the opportunity to enjoy preferential interest rates equivalent to the deposit level, which is very difficult to find in interest markets. For example, the preferential interest rate is only 7.3% of Vietcombank or 7% interest rate from the recent home loan support package of BIDV. Borrowers can flexibly choose the interest rate corresponding to the appropriate preferential term.

Specifically, as in the loan package to support buying a house just mentioned by BIDV, customers can choose between many loan packages: 7% / year for the first six months, 7.5% / year for the first 12 months, or only from 8.8% / year applied in the first 24 months from the time of the first disbursement.

4.The fourth benefit: Reducing opportunity costs and liquidity risks: The strong spending and “freezing” a large amount of capital in the apartments is a personal financial barrier that makes many homebuyers afraid. In many ways to reduce opportunity costs and optimize capital flexibility, installment loans are the most feasible and most straightforward option to implement. For individual investors, by splitting cash flows and extending the payment time from large loans into periodic installments, borrowers can minimize their liquidity risks to a minimum when available—enough time to organize their finances. In the long term, investors can revolve capital for other investment options to generate increased profits instead of just passively “confining capital” in this particular type of asset. On the other hand, like a mutual fund, a real estate syndication fund allows investors to buy a share of multiple properties, which spreads their risk around for better stability, more diversification, and a higher likelihood of quality returns on the property syndication fund.

The fifth benefit: Personal financial management more effectively: Installment loans help personal financial management more effectively; an advantage comes from combining the above four advantages. Homebuyers are more proactive in managing cash flows, reducing risks and costs, and enjoying low-interest rates. Not only that, but Vietnamese investors also benefit from financial management tools provided by consumer credit data.

Opportunity to enjoy preferential interest rates when using financial leverage to buy a home

About the risk:

Using financial leverage in real estate investment, although bringing about a great source of profits, this method still has many potential risks that real estate investors should know:

  1. Risk number one: Double-edged sword: The most crucial factor in applying financial leverage is “fast win fast”. If an investor’s incorrect calculation on real estate investment, it will make the purchase and sale of the apartment for rent in district 2 difficult, causing capital and interest to be stagnant. For investors who do not have fixed money, this will be the end of their real estate business.

2.Risk number two: Dangerous if you do not know how to choose a loan: For a real estate business based on financial leverage, the choice of a financial loan is paramount to 50% of the business’s success. The reason is that the interest rates for loans to buy and sell real estate of banks are very high, about 7-11%, much higher than ordinary loans. On the other hand, each bank has preferential loan policies such as (FDI; ODA …), lack of understanding and not knowing how to take advantage of these loans also makes your profits decrease or increase risks.

  1. The third risk: The real estate market is volatile/

It can be seen that the real estate market in our country is still volatile, making housing prices go up and down erratically. These fluctuations have a particular impact on financial leverage when buying real estate. In a case where housing prices plummet or freeze, the leverage method is entirely counterproductive.

It can be said that using leverage in the real estate business to make a profit is a new and daring form. This method has interleaved effects on our country’s real estate market. On the one hand, the appearance of many new real estate giants, on the other hand, makes the real estate business, buying and selling situation more and more unstable and challenging to control. Investors need to consider carefully before deciding to use this method to invest in real estate get rich.

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