Financial leverage is the relationship between credit and own capital invested.
It is well known that a mortgage in a property adquisition 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 who 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 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 to commercialization, being able to spend the revenues obtained from it on re-investing or renting the summer house, but 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 from 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 the ones 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 will change the position of the city in the international markets.
Real Benefits of financial leverage
Borrowing to finance an operation (financial leverage) increases profitability. When operating with outside capital, 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 adquisition 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 under 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 considedred, 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 with 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, then we simplify and do not include the income obtained between the purchase and the sale.
If your house were sold for 1.1M and financed for 1M (full own capital):
– Profits of 10% = (1.1M – 1M) / 1M
If your home were sold for 1.1M and financed for 1M (bank’s input of 0.5M)
– 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 Intercontinental Hotel and near to Miguel Angel Hotel.
If you are an investor or homeowner, we help you maximize the benefits from your house, furthermore we provide assistance in case you are also interested into a Permanent Residence by a Property adquisition.