Financial Leverage refers to an investment strategy that uses borrowed money to acquire additional assets in order to increase the potential overall return of the investment. Below are two examples to illustrate the use of financial leverage with property investments.

Mirriam uses $500,000 of her cash to invest into the purchase of a brand new, luxury 3 bedroom, buy to let apartment, the total cost is $500,000. Mirriam is not using financial leverage.

Winnie uses $500,000 of her cash and borrows $1,500,000 to purchase 4 identical brand new, luxury 3 bedroom, buy to let apartments, the total cost is $2,000,000. Winnie is using financial leverage. Winnie is controlling $2,000,000 of buy to let property with only $500,000 of her own money. Winnie is using the rental income to cover all of her operating costs.

If the buy to let apartments owned by Mirriam and Winnie increase in value by 5% per annum for 5 years and then are sold, Mirriam will have a $125,000 gain on her investment, a 25% return. Winnie’s investment will sell for $2,500,000 and a gain of $500,000. Winnie’s $500,000 gain on her $500,000 initial investment will result in a 100% return. When assets increase in value financial leverage works well.

When assets decrease in value, leverage doesn’t work well.

At Providentia we only offer investments in prime real estate projects that have all of the bases covered in order for you to have the best possible opportunity of achieving strong capital growth on your property investments.