“Throughout my career I have invested in property as security and seen the electronics as the risky part of my business. I’ve got £300m of property, mostly in trophy buildings around London, and I don’t owe a penny. If this were leveraged properly it could be £3 billion overnight. I need to put these assets to work, raise equity and become a proper real-estate trader.”
(Source: The Sunday Times, 5th August 2007)
If it’s taken Sir Alan all these years to appreciate the value of leverage, then you needn’t feel too bad if the penny hadn’t quite dropped for you until now either! What I would emphasise is the phrase in the middle of that quotation – “If this were leveraged properly…” – because it’s imperative that you do your homework and have a solid plan for servicing the
debt you’ll be taking on, before you rush out and start looking to remortgage your home. Again, it’s a simple principle, but not an easy strategy to execute.Steve Bolton.
Just as leverage can work on your behalf, it can also work against you. For example, if you use a $100,000 down payment to purchase a $500,000 home, and real estate prices in your area decline for several years in a row, the leverage works in reverse. After year one, your $500,000 property could be worth $475,000 if it depreciates by 5%. A year after that, it could be worth $451,250 - a loss in equity of $48,750.
ReplyDeleteUnder that same 5% price-decline scenario, if that $100,000 had been used for an all-cash purchase of a $100,000 home, the buyer would have lost just $5,000 the first year home prices fell