Using Leverage for Bigger Returns on Commercial Property Investments

December 5, 2022

People with a sizable amount of extra finances are opting to set some aside for investing in lucrative commercial properties in quickly-expanding markets in recent times. Avid investors scout various options, from student accommodation and storage facilities to RV parks and office spaces.

However, experts claim that using leverage in commercial real estate can bring in better returns than expected, ensuring you enjoy significant profits quickly. It can lower the risk by allowing you to invest in multiple assets simultaneously, ensuring you have a tenant in at least one, even if the rest are unoccupied.

Refer to the following points to better grasp how leverage can be an incredible tool to maximize your property investments.

What It Means

Also sometimes referred to as gearing, it uses borrowed finances via legitimate financial entities to maximize the returns from an investment. In other words, it means not using a hundred percent of your money on a single asset. Instead, it means employing multiple capital sources to unlock lucrative deals that might otherwise be impossible to enjoy.

It is generally measured by the Loan-to-Value ratio (or LTV) that depicts the loan in percentage value of the property’s market worth. It will help you avoid potential risks by ensuring prudent decisions and accurate accounting of vacancies and loans.

Understand with an Example

Leveraging is integral to the global property market, proving how even amateur investors can quickly reap significant profits. Those who need clarification on what it truly means can consider the following example.

Suppose you wish to buy a house worth $500,000. You can invest twenty percent of the total capital, or more specifically, $100,000, and borrow the rest. This way, you utilize considerably fewer finances from your savings and rely on a legitimate lender for the rest.

Assuming the asset appreciates approximately five percent annually, the investor’s net value reaches $525,000 in a year. If the individual had spent $100,000 on an outright purchase, they would not enjoy such profits.

Ways to Access It

Loans and mortgages are among the typical methods folks use to bring in money for asset investing. You can choose reputable banks, private lenders, or credit unions. Some programs may even allow you to spend less than the usual cash required for a venture, allowing you to retain a reasonable budget for other assets.

Before finalizing the deal, you must carefully study the loan terms, interest rates, fees, prepayment penalties, and other details. It will save you the trouble of paying unreasonably high-interest rates and other hassles later.

Consider Partnering with a Syndication 

Besides using leverage in commercial real estate, a surefire way to enjoy quick returns is via group investing in multifamily properties through reputable private equity firms. They provide investors with the most lucrative Class B and C assets that enable them to avail of a steady stream of second income while enjoying part ownership of the asset.

Moreover, the assets are all managed and cared for by the syndicator, allowing investors to enjoy their own time without being physically involved in any deal. Finally, these investments can be more stable than others as you can rely on multiple tenants for regular rent rather than a single-family unit that might lie vacant for a long time.

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