Leverage: a powerful tool when used methodically

One of the main advantages of property investment is the ability to use bank financing as a lever for creating and structuring wealth.

• The investor contributes a portion of the equity
• the bank finances the balance
• returns are assessed based on the total value of the property, not solely on the capital invested

In buy-to-let property, it is not the investor’s income that repays the loan, but the rent paid by the tenants.

Month after month, interest and capital are repaid through rental income, while the investor retains ownership of the asset.

This mechanism becomes increasingly powerful over time:

Example

🔎 To illustrate the leverage effect, it is deliberately more prudent to start with a conservative scenario: purchasing at market price, with no immediate capital gain. ‘Deals of the century’ do exist, but they do not provide the basis for a strategy that can be replicated for all our clients. A sound wealth-building approach is based on realistic, repeatable assumptions that remain consistent over time.

📊The same property, two strategies:

1. an investment with leverage, through bank financing
2. the same investment without a loan, financed with 100% equity

In both cases, the assumptions are prudent and realistic: purchasing at market price, rents indexed progressively and a reasonable increase in the property’s value over time. No ‘exceptional deal’, no optimistic scenario. A property is purchased and rented out for 10 years. It is then sold after 10 years. Let us compare the scenarios with and without leverage.

🏠 Purchase assumptions

• Purchase price: 750.000 €
• Purchase costs (14.5%): 108.750 €
• Total project cost : 858.750 €

💶 Rental assumptions

• Initial rent: 3.000 € / month
• Annual rent indexation: 2.5%
• Rent received over 10 years: ± 403.000 €

🔄 Exit assumption (=resale after 10 years)

• Estimated property value in 10 years: ± 1.060.000 €

🚀 Scenario 1: with leverage

• Equity invested (~30%): 250.000 €
• Bank loan: 608.750 €
• 20-year loan at 3.5%
• Fixed monthly bank repayment (interest + principal): ± 3.530 € / month (± 42.360 € / year)
• Repayments over 10 years: ± 423.600 € (comprising approximately 165.000€ in interest owed to the bank and approximately 260.000€ in principal)

👉 The rental income repays almost the entire loan. After 10 years:

• Outstanding principal: ± 350.000 €
• Net proceeds from the resale (resale price – outstanding balance): ± 710.000 €
• Cumulative net rental income (rent received – monthly bank repayments): – 20.000 €

📈 Result with leverage

• Equity invested: 250.000 €
• Final net capital [net proceeds – net rental income received (= rent received – bank repayments)] : ± 690.000 €
• Increase in equity: +176%. Your equity will have almost tripled in 10 years!
• Average annual return on equity: ± 10.8% / year

🧱 Scenario 2: without leverage

Let us take exactly the same property, the same rental income, the same market trends, but without a bank loan.

• Equity investment: 858.750 €
• No loan, no repayments
• Rental income received over 10 years: ± 403.000 €
• Net proceeds from resale: 1.060.000 €

📈 Result without leverage

• Equity invested: 858.750€
• Final net capital (net proceeds from resale + rental income received): ± 1.463.000 €
• Overall gain: ± 604.000 €
• Increase in equity: +70%
• Average annual return on equity: ± 5.5% per year

The difference between the two scenarios:

• With leverage: 250.000 € invested – ± 10.8% annual return – Equity: x2.76
• Without leverage: 858.750 € tied up – ± 5.5% annual return – Equity: x1.70
• Under identical assumptions, leverage enables equity to grow approximately 1.6 times faster than without a loan

A loan therefore makes it possible to: commit less capital (or, with the same amount of equity, spread the risk by diversifying across several projects), multiply the return on equity, while allowing tenants to repay the bulk of the investment.

👉 A loan is not inherently a risk: used poorly, it is; properly structured, it acts as an accelerator for wealth creation.

🤝 Our role at J&J

At J&J, we support investors specifically with these matters:

• defining a strategy aligned with their profile and objectives,
• analysing projects using prudent, replicable assumptions,
• structuring the financing,
• identifying suitable opportunities, whether turnkey or with potential for value enhancement.

🎯 The aim is not to promise unrealistic returns, but to build robust, clear and sustainable property strategies.