Taking a loan is an important decision that you need to make as it will lead you into debt. Especially for real estate loans, where the loan quantum is very large and would result in you being heavily in debt. However, taking a loan for a property is actually not as bad as it seems. Often, it could even result in a higher investment yield by taking a loan as compared to not taking a loan. We will compare the different rate of return by paying upfront capital for a real estate or taking a loan for a real estate. You will understand the concept of leverage and how to use it to your advantage. We will discuss two scenarios of income-producing properties(renting out, investment) and consumer homes(own stay).

Brief Overview of Leverage

Bringing leverage into the real estate. Many property buyers take a loan not because they want to use the power of leverage but rather because they do not have enough upfront capital and they must borrow to obtain the property of their liking/needs. However, as an investor, we need to understand if leverage is to our advantage or not. This is important so that we are able to calculate our returns.

Calculating Returns

I will use the method from my article CashFlow Method of Analysis, we need to identify the cashflows for every year of the investment. We will then discount it back to find the Internal Rate of Return(IRR).

This is a real-life example of a condominium named The Beacon in Singapore and we are going to disect and calculate the actual returns with and without taking a loan. For the calculations, I will include some assumptions. I will not take into account of property taxes, or other miscellaneous costs such as repair of the property. The maintenance fee would be assumed to be $350 monthly. We will assume to buy the property at the start of 2010 and sell off the property at the end of 2018. We will also assume a fixed mortgage of 80% LTV, with fixed monthly payments for 25 years of 3.5% interest. This is to ease computation.

 Date Size Price
2018  1,044sqft  $1,388,888
2010  1,044sqft  $910,000

Consumer Homes

Without A Loan: The cashflow will be as such, every year maintenance cost will be $4,200($350x12)

         Cash Flow
 Year 0 Year 1  Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
 -910,000  -4,200  -4,200  -4,200  -4,200  -4,200  -4,200  -4,200  1,384,688

Calculating IRR = 5.04%

With A Loan: The cashflow will include mortgage payments, maintenance cost and final loan repayment.

         Cash Flow
 Year 0 Year 1  Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Actual  -910,000  -4,200  -4,200  -4,200  -4,200  -4,200  -4,200  -4,200  1,384,688
With Loan Payment +728,000 -43,734.48 -43,734.48  -43,734.48 -43,734.48  -43,734.48  -43,734.48  -43,734.48  -559,750.63
Final CF  -182,000  -47934.48   -47934.48   -47934.48   -47934.48   -47934.48   -47934.48   -47934.48  824,937.37

Calculating IRR = 8.59%

There is an increase in the rate of return as the interest rate for the loan is lower than for unlevered rate of return. Thus, taking a loan would be a better choice.

Investment Properties

We will assume that the person who bought The Beacon is an investor and he bought it to rent out to collect rental income. From transaction data by 99.co for the past 10 years the average rent psf is $4.01. Multiplying by 1,044 sqft we get an average rent of $4,186.44, to make it simpler we just take $4,000 for his monthly rent. We will also assume that only after 3 months he found his tenant.

Without A Loan: Similar to the above example, but now we can include the rental income.

         Cash Flow
 Year 0 Year 1  Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Actual  -910,000  -4,200  -4,200  -4,200  -4,200  -4,200  -4,200  -4,200  1,384,688
With Rental Income 48,000 48,000 48,000 48,000 48,000 48,000 48,000 48,000
Final CF -910,000 43,800 43,800 43,800 43,800 43,800 43,800 43,800 1,432,688

Calculating IRR = 9.50%

With A Loan: Similar to the above example we will include the monthly mortgage payment and also the remaining loan balance repayment at the end of 8 years.

         Cash Flow
 Year 0 Year 1  Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Actual  -910,000  -4,200  -4,200  -4,200  -4,200  -4,200  -4,200  -4,200  1,384,688
With Rental Income 48,000 48,000 48,000 48,000 48,000 48,000 48,000 48,000
Loan Payment +728,000 -43,734.48  -43,734.48  -43,734.48  -43,734.48  -43,734.48  -43,734.48  -43,734.48 -559,750.63
Final CF -182,000 65.52 65.52 65.52 65.52 65.52 65.52 65.52 872,937.37

Calculating IRR = 21.67%

As you can see the IRR increases drastically as the IRR without a loan is much higher than the 3.5% interest rate of the loan. Thus when a loan is used, positive leverage effect comes into play. If you notice the tenant is also paying for your monthly installment.

How Does Rate of Return Changes

If there is positive leverage effect, an increase in LTV will increase the IRR. A decrease in loan interest rate will also increase the IRR. Capital or rental appreciation will also result in an increase in IRR.


This scenario shows a positive leverage effect mainly due to the appreciation in the price of the property over the course of this 8 years. The example that I have given you are past data. We are not able to foresee the future thus we need to assume the rate of capital appreciation and rental income. This can be done by having a good knowledge of the real estate market. Using the rate of inflation could be a safe and good gauge as well. Other costs such as property tax, repair and maintenance, vacancies should also be included for a more in-depth and accurate analysis. This is why many people invest in real estate for wealth accumulation.

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