Many people believe that the best way to buy some property is via money, as they are fully aware of how much something will cost and how much the process will last. On the other hand, they overlook using collateral thinking that it is a waste of assets value because there is no reason to leverage other assets or use them as collateral when you can avoid having any obligations to some third party. Even though there is some truth to this statement, there are much more benefits regarding collateral and why someone would use it for buying property. Overall, it is a bit more complicated process, but if properly done, you can only benefit from it, and by quite much. That is why we will focus more on that today so that by the end of this article, you will be fully aware of all the benefits of using collateral and how properly do so.
Velocity of dollars
One of the perks of using collateral is the so-called “movement” or velocity of dollars, as the main goal is to use your assets the right way, as it is the best way to grow and expand your fortune. The way things work here is simple, and once you start using collateral, it speeds up the entire process, and you gain more from all of your assets. It increases your financial flexibility without having to divide your money, and this is where most people make a mistake, as dividing your money can only end up in debt. That is why the goal is to avoid having way too many accounts with no money on them, and by using collateral, that’s what you will avoid precisely. The goal is to use your assets to work for you while leveraging them, which means that you will earn more because you will gain more profits, as one asset will bring you money in multiple ways, which will make your equity much higher in general.
Divide and conquer
It doesn’t matter if some people have experience investing in real estate, stocks, or even crypto, as the first and most important rule is to divide your investments over several assets. The main reason for such action is to reduce possible losses in certain types of investments. But with investing in property, doing so will actually bring you more profits. Just imagine wanting to invest in only one property for a certain amount of money, and the rate of return is 25%. Now, imagine investing the same amount of money but buying four or five properties with the same value, which is possible if you use collateral, as you will get approximately 20% down.
Doing so will mean that your rate of return will now be four or five times higher annually just because you used collateral. That is why every experienced investor strongly suggests taking these actions, especially if we are talking about properties that have high value, as the higher the value, the higher rate of return will be. Of course, this is something you can do even on a bit smaller scale – for a bit smaller investments, which can be a great way to expand and grow, with the goal to, at some point, get to the point where investing in properties with the highest possible value is a normal thing. Once you get to this point, you can consider yourself a successful real estate investor.
Use mortgage the right way
Many people believe, and even some experts suggest, that the sooner you pay off your mortgage, the better, but that doesn’t necessarily have to be the truth if you do everything as we will suggest. Namely, even with a mortgage, there are certain exceptions where it is much more profitable not to pay it off as fast as possible. The key is to calculate everything in advance, and the best example for that is when you buy some property, you pay 25% of your own money and take a loan to cover the rest. The rate of return also plays the main role here, as if you do this, you will reduce annual expenses while still gaining the same rate of return for that property. By doing so, you will be able to slowly build a fortune while returning the loan and covering the mortgage. Understandably, this is one plain example of how it all works, yet it still provides a great insight into how people whose debt is pretty big still make a fortune annually, as investing in real estate is much more than just buying some property.
Make sure not to over-leverage
One can easily get carried away and leverage as many assets as possible in order to gain more profits annually, but this can have devastating results in the long run. Namely, the most important thing is for your overall real cash value to be synergetic, meaning that both liquid capital and leverage are covered. The logic behind this is simple, the more assets one has, the higher the chance that something might go wrong. Imagine that you have ten properties, and on 2 of them, you need to change the roof, while for 1 of them, some interior repairs are needed. That can have a huge impact on your budget, and if there isn’t enough liquid capital, it can represent a problem that will, with time, get only bigger.
Understandably, this is why doing the math upfront and considering how much leverage your budget can take, considering even those things that might go wrong, are a must. Leverage can be a great way to earn big every year, but only if it is done in the right way, and besides not knowing how collateral works, the complexity of these actions is the reason why people are often not willing to use collateral. Having a regular cash flow from your leverage is the only way for this to work, and by over-leveraging it, the cash flow will stop, which will only increase your debt.