What You Need To Know About Leveraged Loans

Leveraged loans can come in handy for real estate investors who are a little short on funds. But before you decide to pursue this lending option, it’s important to understand how it works.

What Is a Leveraged Loan?

In finance, the term leveraged loan — also goes by other names such as an adjustable-rate loan, floating-rate loan, syndicated loan, senior loan, bank loan, et cetera — involves the use of borrowed funds to purchase an asset. As a real estate investor, instead of purchasing a property directly with the little cash you have, you split that money and use it as down payment for other pricier properties. When the properties finally sell, you will have profited off from not only the amount you put up as down payment but also on the money you borrowed to purchase the properties.

For instance, as a real estate agent, you have $200,000 to invest in a property. You can choose to simply purchase a home worth the amount outright and resell it later at a profit or split your $200,000 in half and use it as down payment to secure two expensive homes worth half a million each. In a year, let’s say the properties appreciate by 5 percent rate. That means that the outright purchase will go for $210,000, leaving you a profit of $10,000. At the same appreciation rate, the other properties will go for $525,000 each ($25,000 profit for each). That’s $50,000 in total. Easy, right? No. Not really. It’s not that simple. There are two major factors to take into account before you borrow a leveraged loan:

• State of real estate market in your area– Before you invest in an area, look at the situation of the housing market. It’s probably going to be a bad investment if house prices are plunging.

• Interest rate decreases your profits– Like every other type of loan, leveraged loans come with interest payable every month with the loan payment. The amount of interest you end up paying will depend on the loan term and the amount of leverage you choose.