Leverage: Increasing Your Property Net Worth

Leverage is the use of various financial instruments or borrowed capital to increase the potential return of an investment – and it is an extremely common term on both Wall Street and Main Street when talking about the property market.

How Leveraging Works

Consider the common property purchase requirement of a 10% down payment – or RM50,000 on a RM500,000 asset. When a purchaser puts only 10% of the money down, and borrows the rest, is essentially using a relatively small percentage of his or her own funds to make the purchase; the majority is being provided by a bank. That's why property investors often refer to the 90% remainder of the purchase price as "other people's money": It is, in fact, being provided by someone else.

Assuming the property appreciates at 5% per year, the borrower's net worth from this purchase would grow to RM525,000 in just 12 months. Comparing this gain to the gain from a purchase made outright, without any loan, highlights that value of the leveraging strategy. For example, the same borrower could have used the RM250,000 to make a paid-in-full purchase of a relatively more affordable property.

Assuming the same 5% rate of appreciation, the buyer's net worth from the purchase would have increased RM12,500 over the course of 12 months, versus RM25,000 for the more expensive property. The RM12,500 difference demonstrates the potential net worth increase provided through the employment of leverage. Now, picture that 5% gain every year for 20 years. Over time, the use of leverage can have a significant, positive impact on your net worth.

Ways to Access Leverage

The easiest way to access leverage is to use your own money. In the case of a mortgage, a standard 10% down payment gets you 90% of the house in which you want to live. Some financing programs let you put even less money down, e.g. My First Home Scheme or better known as Skim Rumah Pertamaku.

If you are purchasing an under construction property directly from a developer, you may be in a position where the developer is giving some rebates. Under such an arrangement, you can purchase a property with little money down.