Many real estate investors have made money out of capital appreciation of properties they invested in. Some investors have used borrowed funds from banks in the form of housing loans to get even superior returns on their investments. These types of investments where borrowed funds are used are known as leveraged investments and can very often get astonishing returns. This is best illustrated by using a real life example.

My client Mr. Hegde purchased a plot of land for Rs.18 lakhs in 2011. Out of this Mr.Hegde’s personal contribution was Rs.4 lakhs. The balance of Rs.14 lakhs was funded by the bank. Till date he has paid the bank an interest of about Rs.6.5 lakhs. If the property were to be sold in the market today it would fetch him Rs.50 lakhs resulting in a neat profit of Rs.25.5 lakhs. The table below shows a comparison between leveraged investments used by Mr.Hegde and also shows the returns if he would have financed the investments out of his own funds.

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From the above it is clearly seen that the leveraged investment is far superior because in a period of about 4.5 years Mr.Hegde’s original investment of Rs.4 lakhs has produced a profit of Rs.25.5 lakhs resulting in a return of 637.5% when annualized giving a return of 142% per annum.

On the other hand it is seen that if Mr,Hegde had used his own funds then he would have earned a profit of Rs.32 lakhs in a period of 4.5 years resulting in a return of 177% when annualized giving a return of 44% per annum.

The above example clearly illustrates the advantages of using borrowed funds to get superior returns in real estate investments. However, leveraging can be a double edged sword and give adverse results in times when interest rates are high and property appreciation rates are low. So one must use leverage with discretion.

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