Investing in real estate: Should I continue to apply for credit?

There are many investors who prefer to resort to debt to finance their real estate investments, rather than carrying out their investments exclusively through equity. However, with the recent rise in interest rates, the question arises whether resorting to financial leverage remains a valid strategy.

The effect of debt on real estate investments

In previous articles, I already had the opportunity to list the effects and benefits of resorting to debt to finance real estate investments. In short: It enhances the profitability of invested equity; It allows greater and better diversification in an investment portfolio; It can lead to an asset accumulation effect. In theory, the more debt put into an investment, the greater the return generated on invested equity🇧🇷 of course, the greater the risk🇧🇷 For this reason, the effect of leverage can be interesting in some cases, as it allows an investor to achieve a higher return on his own capital, in addition to allowing him to make more investments. Of course, there are scratchs associates. We have also addressed this issue and seen that the interest rate risk or even the financial risk of not being able to generate sufficient flows to meet debt service are the most obvious and immediate. The long period that the market lived with historically low interest rates greatly boosted investment in real estate. The low cost of debt, combined with a scenario of historically low yields, provided a strong increase in investment in more value-add strategies and an appreciation of real estate assets.

At the same time, it allowed the leverage of investments – whether yield-based investments or more focused on capital gains – at a very low cost, thus enhancing a greater return on equity. Also read: Risks in leveraging real estate investments

And now, is it still worth financing real estate investments?

With the rise in interest rates, it is important to reflect on whether the effects that debt causes on the return on invested equity are still maintained. If, in theory, recourse to debt enhances the return on invested equity, in practice this may not happen.

In the current context, with high interest rates, the cost of debt may be higher than profitabilityof operational investment🇧🇷 In such cases, the investment will not benefit from leverage. Thinking about a simple case, in which I am looking to invest in a buy-to-let with a gross yield of 5%, it is enough for the contracted interest rate to approach this value for the effect of leverage to be harmful to the return on invested equity. In practice, if the return I expect to obtain from a given real estate investment is lower than the contracted interest rate, at the outset it will not pay to resort to debt. Therefore, before seeking to leverage your real estate investments, do math and try to calculate the returns🇧🇷 Only afterwards, then, will it seek to analyze financing alternatives. Good business (real estate)! Also read: Real Estate: After all, what is a yield and how is it calculated? The content Investing in real estate: Should I continue to apply for credit? appears first on Doutor Finance – We take care of your financial health.