Expanding your real estate investment portfolio can be very lucrative if you do it right, and there are several ways you can finance your purchases. Using a mortgage is among the most common ways to acquire real estate, and leveraging real estate might just be the right move for you.
What is Leverage in Real Estate?
Leveraging is when real estate investors take out a loan to use less of their own money to purchase a property. Provided that the property value increases over time, they would stand to profit from the investment. However, it does come with certain risks too.
If the investment property decreases in value, real estate investors can lose money, especially if it drops below the mortgage amount. In simpler terms, leverage in real estate is a double-edged sword. It uses a smaller amount of people's money for a down payment but increases the risk of bigger losses.
How You Can Use It to Your Advantage
Turn Your Investment Into a Rental Property
One of the best ways to ensure that you can make mortgage payments is by profiting from the property itself as you turn it into a rental. The cash-on-cash return would certainly be bigger, and you can get your down payment back faster.
Of course, you have to put in the extra work to ensure it remains profitable, but you have the option to hire a professional property manager to earn passive income. Hiring someone with expertise also increases the chances of your leveraged property getting positive cash flow.
Diversify Your Portfolio Quicker
Instead of paying a large down payment, you can put a smaller down payment and use borrowed capital for the rest of the purchase price of the investment property. Once you earn more than you need for mortgage payments, you can start expanding your real estate portfolio.
This allows you to own multiple properties by leveraging more real estate. With the same principle as acquiring one property using loans, you’re also increasing your risk or reward exponentially when you use leverage in real estate investing.
Protect Yourself from Inflation
Real estate investments can be a good way to protect yourself from economic issues like inflation. The mortgage loan will remain the same even if prices are increasing. Inflation hedging is a common practice used by experienced investors.
If you turn your investment into a rental property, you can implement a higher rent price for higher capital values. Investors can also maintain the buying power of capital by "incorporating some of the inflationary pressure in the form of capital appreciation."
Risks You Need to Consider
The advantages of leverage in real estate rely heavily on being able to pay off your loan, which you can do by elevating property values or turning your property into a profitable business. Otherwise, some risks can turn into heavy costs. You should consider things like:
A Decline in Real Estate Values: You can lose your down payment and other people's money if the property value drops below what you owe for the leveraged investments, so it's best to consult experts for predictions on when real estate values rise or drop.
No Guarantee of Profitability: Positive cash-on-cash return is not guaranteed even with professional insight into the real estate market.
You Could Lose Assets: Secured loans require collateral from you in case you fail to make your loan payments. If you can't pay on the agreed-upon terms, the lender will have to take the collateral as payment, leading to you losing a valuable asset.
Loans You Can Consider for Financial Leverage
- Mortgage
This is the most common loan investors take for real estate projects. It's easier, and you can get a mortgage from various institutions like banks and credit unions. Like most loans, you will make regular monthly payments until you pay off your debt and interest.
Since this is a form of a secure loan that provides better interest rates, there will be stricter requirements such as minimum credit score and down payment. The property you intend to purchase will serve as the collateral, meaning you’ll lose it if you fail to pay.
- Home Equity Loan
A home equity loan or home equity line of credit (HELOC) is a viable financing option if you have equity built up in your home. It can cost less than other types of loans and allows you to borrow larger capital for your investments.
One downside is that if you fail to make payments, you will lose the home you put down as collateral. If the real estate market experiences a downturn, you can also end up owing more than the cash invested.
- Hard Money Loan
Primarily used in real estate transactions, you can opt for this loan if you want to acquire money fast. It also uses property as collateral, and the amount you can borrow depends on the value of your collateral, although you can negotiate the loan-to-value ratio with the lender.
Interest rates will be higher with hard money loans, meaning that you will have higher monthly mortgage payments. As of 2025, the interest rate on hard money loans is around 9.5% to 12%, whereas home equity loans are at an average of 8.44%.
- Private Loan
This can depend on whether you have connections to people you can loan from, such as businessmen or family members with money to lend. While borrowing money from family can be a messy business, you can always draft a contract to avoid misunderstandings and disputes.
Consult a Professional to Make Better Decisions
The real estate industry can be overwhelmingly complex, and missing key information can lead to bad investments. Companies like Austin Property Management help you gain crucial insight into current market conditions, as well as manage your property to maximize its value.
Schedule a free consultation with us today. Even if you don’t own rental property yet, we can help guide you through your investment decisions and beyond.
