At the beginning of 2022, the British singer Adele formalized a mortgage of 37.7 million dollars to finance her new mansion in Beverly Hills, Anglo-Saxon tabloids publish. But Adele has liquidity to pay off the debt immediately. Why then ask the bank for money and pay interest on it?
Let us introduce you to two investment concepts —positive debt and financial leverage— that confirm that taking out a mortgage to invest in housing can be a good idea, if done sensibly.
If the borrowed money generates a long-term benefit, we speak of positive debt. Investing in a business, for example, aims to have a positive impact on your finances. The same happens when buying a home as an investment and requesting a mortgage for it: the debt is used to access an asset that, you trust, will appreciate over time.
There is also negative debt. Suppose you have lost a tooth and you must pay a thousand euros for an implant, which you will pay in several installments. It is irrecoverable money, which you decide to finance —perhaps because you don’t even have it on hand— but it does not give a return over time.
Negative debt is not dangerous if it is a necessity and you keep it under control. But a loan to buy a luxury car beyond your means, for example, should activate a red alert in your personal finances.
The fact of requesting a mortgage to invest has a name: financial leverage. With this method, investors intend to buy homes without having the necessary capital or, on the contrary, use less capital for the operation and diversify the rest among other assets.
Leverage to invest in a flat can also maximize rental profitability, since the capital invested is substantially less. Of course, it will be necessary to consider the mortgage interest as one more expense of the operation.
It should not be forgotten that banks offer less generous conditions when it comes to investments, as they are homes for use other than the habitual residence. 70% financing as a general rule, a higher interest rate or a shorter repayment term are frequent in these cases.
The investor mindset plays an essential role in decision making. On this, the person in charge of Housfy Inversión, Iván Guillén, explains that the investors who use his services have very varied intentions, which make them bet on one method or another.
Guillén distinguishes between three investor profiles: the rentier, the mixed and the patrimonialist.
Rentier investors stalk properties that barely reach €100,000 and are located in depreciated areas, but with greater potential, where the price of housing is lower, but the rental demand is very high.
A patrimonial profile, on the other hand, puts “the quality of the home at the sacrifice of profitability,” says Guillén. This type of investor looks for homes in more coveted areas to ensure that they will not lose value in the future, “and even that he or a direct family member can use in the future”, points out the Housfy expert.
Between these two profiles, we would find the mixed investor. He is somewhat more concerned with the characteristics and location of the home without reaching the point of being a property investor, and is capable of giving up a certain percentage of return compared to an annuitant investor.
As for getting into debt, Guillén leaves it in the hands of the investor, according to his objectives. “There are those who think that it is worth more to play with someone else’s money,” says the Housfy ambassador, and “who prefer to manage the operation in cash, forget about everything and have a higher monthly cash flow.”
If you opt for financial leverage, like the superstar Adele with her mansion in California, part of the remaining capital can be invested, for example, in investment funds or fixed-term deposits, whose profitability may be tighter, but the return is assured .
Be that as it may, you have to be cautious with your own assets and never run out of cash. A piece of advice would be to have an emergency fund aside to cover last-minute expenses and thus keep yourself safe from negative debt.
