Metrocity Realty

Investing? Read How Financial Leverage Works


"Give me a lever and I will move the earth" is an apt metaphor for what real estate can achieve.

More than any other form of investment, owning real estate gives you the leverage to use other people's money ... to acquire more real estate.

Basically, if you incur the debt, then you profit from all the benefits of owning property (such as rental income and any capital gain) despite the fact that the property value does not reflect your equity in it.

Borrowing makes you richer

Even better, if the net financial benefits of owning this property are more than the financial costs of interest payments, then borrowing is more profitable to you than owning a debt-free property!

This strategy has been used to make people's fortunes! Take a few minutes to do the sums and compare Strategy A (buying property without debt) with Strategy B (buying property using debt).

Let's assume the following: Amount to be invested is $290,000. Returns are 5% capital gain, 6% rental income, less 2% outgoings, which makes 9%. Cost of funds is 7%, and your cash deposit is 10%.

financial leverage

Strategy A, debt-free

Total value of asset: $290,000

Return on equity = 9% x $290,000 = $26,100


Strategy B, using debt

Cash deposit of 10% ($29,000) and $261,000 remainder is borrowed.

Total value of asset: $290,000

Return before interest = 9% x $290,000 = $26,100

Cost of funds = $261,000 x 7% = $18,270

Return on equity = ($26,100 - $18,270) ÷ $29,000 x 100 = 27%


No difference at all

Using the above assumptions and disregarding transaction costs, there is no mathematical difference between ...

  • using $290,000 to put a deposit on one property worth $2.9 million;
  • 10 properties @ $290,000 each.

In real life, the benefits of having a diversified portfolio would probably outweigh any desire to minimise purchase costs by buying one large asset.