What You Need To Know About Leveraged Loans

For an ordinary citizen, something that comes with the word ‘leveraged’ attached to it cannot be good. Therefore, many will run from it even before they try to understand what it means. However, leveraged loans are not all that bad, particularly for cash-strapped investors.

last updated Wednesday, May 17, 2023
#Leveraged Loan #Real Estate Investors

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John Burson

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CONTENTS

Leveraged loans can be helpful for real estate investors who are short on funds. But before you decide to pursue this lending option, it’s essential 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 using borrowed funds to purchase an asset. As a real estate investor, instead of buying a property directly with your little cash, you split that money and use it as a down payment for other pricier properties. When the properties finally sell, you will have profited from the amount you put up as a down payment and 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 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 a down payment to secure two expensive homes worth half a million each. Let’s say the properties appreciate by 5 percent in a year. That means 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 gain for each). That’s $50,000 in total. Easy, right? No. Not really. It’s not that simple. There are two significant factors to take into account before you borrow a leveraged loan:

• State of real estate market in your area– Before investing in a room, look at the housing market situation. It will probably be a lousy investment if house prices are plunging.

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

 
 
 

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