The term “investment leverage” is common to many advanced investors. Leveraging investment means borrowing resources to increase the potential return of an investment. In this way, the investor maximizes gains with a much larger investment, without the need to use own resources.
In this article we will explain how investment leverage works for vacation homes in Orlando near Disney, through financing with Florida banks.
Before, we’ll do a brief explanation in the next topic about what investment leverage is and a practical example. If you already have advanced knowledge on the topic, feel free to skip the next topic.
Understanding leverage (practical example)
We will use a simple example of leverage on the Stock Exchange!
Imagine a stock with a potential upside of 20% per year. Suppose the investor’s own resources are $100,000. If this investor only applies its own resources, its expected gain will be $ 20 thousand. However, if this same investor takes a $ 100 k loan in the market, he will be able to apply his resources and the amount borrowed. The total amount applied will be $ 200 k. The potential earning doubles to $ 40 k.
This is a simple example of leverage! In it, the investor will have to deduct from the account the interest charged by the source that lent the resources (bank or financial institution). It is also necessary to consider the risks of the operation. If the stock in question goes down, the loss will also be increased.
Leveraging Investment in Orlando
In the example above we consider an extremely volatile and risky environment, which is the Stock Market. Prices go up and down all the time, exposing the investor to high risks. This is not the case with the real estate market, which tends to always appreciate in value, especially when we are dealing with the real estate market in Florida.
In the case of Vacation Homes in Orlando, there is also a risk mitigation and a strong increase in earnings: the homes allow the activity of vacation rentals. Situations in which the income obtained from the rent exceeds the value of the financing installments are not rare.
How does Orlando Investment Leverage work?
Americans and foreigners are allowed to finance the purchase of a property in Orlando through American Banks. The big advantage is the low interest and the long terms to pay. Especially now, during the pandemic, US interest rates are at their lowest historical level since 1970.
Florida banks require a minimum down payment of 20 – 30% of property value for foreigners, and even less for American citizens. The remaining 60 – 70% can be financed at interest of approximately 4.0% per annum or less.
Consider now that Orlando vacation homes offer an expected return of 5% to 8% a year on rent. Homes with more than 5 bedrooms and close to parks can offer even greater returns. In this calculation we do not include the property’s appreciation, which is currently around 8% per year in Florida. Nor do we include the principal amount of the financing portion (deducted from interest), which is a gain for the investor, since the investor would not be disbursing. When we add the principal amount of the installment, the ROI can reach up to 12% per year.
This means that it is possible to pay off the financing installments and still obtain a surplus with the rent income. The buyer, in this example, will be leveraging his return with funds borrowed from American banks, at considerably low interest and with terms of up to 30 years to pay.
The risks involved in a leverage operation like this are considerably reduced, as investing in real estate is one of the safest and most conservative investments, especially in the case of the Florida real estate market.
Don’t wait any longer. Inflation is up and interests are down
In addition to all the advantages mentioned above, buying a property in Florida borrowing money from a bank has the advantage of using fixed interest low rates. US economy is facing a considerable inflation. In the moment you purchase a property you would be protect from inflation, since the property value will follow it (besides appreciation) and the mortgage monthly payments will still be fixed (fixed interest rates).
About AMg International Realty
AMG International Realty is a global real estate company specializing in Florida. If you are interested in knowing more about the property purchase process and leverage through American banks, contact me now and chat with me on WhatsApp: +1 (305) 318 6968 (Heloisa Arazi).