Financial leverage is the relationship between credit and the own capital invested. It is well known that a mortgage in a property acquisition provides the possibility of operating with funds supplied by a third party and, therefore, with more money than you actually own. On the other hand, in trading, it’s the broker who grants the investor a temporary loan that allows him to trade with a greater position than the amount of cash on his account. However, when purchasing a property, it’s the bank that makes it possible through a mortgage loan.
A second property as an investment to gain profit from
In Spain, it is quite common to have a second home to enjoy during the summer. But very often, a second residence becomes a drag on the family’s economy and ends up being sold; however, there are other options.
Nowadays, the adquisition of a second property is directed toward commercialization, with the ability to spend the revenues obtained from it on re-investing or renting the summer house while ensuring production for the rest of the year. That’s why this type of investment provides some kind of flexibility without being tied to a site or forced to maintain it.
The best locations to take advantage of a property and guarantee real estate investment are in the main cities of Europe, one of them being Madrid, showing a greater future and progress.
In the matter of accommodation, Spain’s capital city has prices below those in cities like Paris, Amsterdam, or London, with more growth to come and the most ambitious development project in Europe. This project will revitalize the economy for the next 15 years and change the position of the city in international markets.
The real benefits of financial leverage
Borrowing to finance an operation (financial leverage) increases profitability. Everything that exceeds the profitability requested by the bank will be yours. But if you operate with a little of your own capital, the profitability will be enormous. Therefore, by trading this way, the profits can be much higher than the initial investment.
Leverage also increases risk. If the market falls, the losses can also be multiplied in the same proportion. Before 2008, investors financed up to 100% of the acquisition since they assumed unlimited price increases, but when the cycle was reversed, many lost everything they already had.
To establish control over the risk, it is important to buy at a good price and choose an area that is always in demand. In addition, try to buy to renovate and do not ask for a mortgage above your future payment possibilities.
We advise buying a house that can be used to produce income. All things considered, the most important aspect is to request a mortgage that does not exceed 80% of the mortgage payment, preferably 60%.
The rental payment from your tenant must cover 120% of the mortgage payment. If, in a crisis, rent prices drop by 20%, you will be covered, and you will not have to contribute additional resources to pay the mortgage loan. You would just have to wait for the economy to improve, because in the long run, everything ends up going up.
Estimating profitability with bank financing
In a simple way, profitability can be defined as profit amidst own resources. We simplify and do not include the income obtained between the purchase and the sale.
Sold your house for 1.1M€.
Adquired by 1M€.
With Full own capital:
Profits of 10% = (1.1M – 1M) / 1M
Sold your for 1.1M€.
Adquired by 1M€.
0,6%M€ bank contribution, so we paid 0,5€
Profits of 20% = (1.1M – 1M) / 0.5M
Additional information for investors in Real Estate
We commercialize our stock through B2C, B2B channels, moving companies, relocation, travel agencies, and our own particular channels with apartment listings for companies and students. We have apartments by days next to Castellana Street, on the other side of the Intercontinental Hotel, and near the Miguel Angel Hotel.
If you are an investor or homeowner, we help you maximize the benefits of your property; furthermore, we provide assistance in case you are also interested in a Permanent Residence by a Property adquisition.