The Power Of Leverage
Leverage is neither good nor bad.
It simply magnifies the outcome.
Two investors can put down the same deposit and end up in completely different financial positions a decade later. The difference is rarely luck. More often, it comes down to how well one of them understood — and used — leverage.
In property, leverage simply means using borrowed money to control an asset worth far more than your own capital. Used well, alongside a well-selected asset, it can accelerate the growth of your wealth considerably. Used carelessly, it magnifies your losses just as effectively as your gains.
Growth On Growth
The Power Of Compounding Returns
Leverage explains why a small deposit can control a large asset. Compounding explains why that asset, left alone for long enough, grows so much faster than most people expect. Each year’s growth isn’t calculated on what you originally paid — it’s calculated on the property’s current, larger value. That’s interest on interest, or growth on growth, and it’s what turns a modest, steady annual percentage into a very large dollar figure over time.
Take a $700,000 property growing at a steady 6.5% a year. In year one, that 6.5% is worth $45,500. By year twenty, the same 6.5% is being applied to a much larger base, and is worth over $150,000 in that single year alone — more than three times the dollar gain, from the very same percentage.
| Year | Property Value (6.5% p.a.) | Weekly Rent (1.5% p.a.) | Annual Rent | Gross Yield On Original Purchase Price |
|---|---|---|---|---|
| Today | $700,000 | $700 | $36,400 | 5.20% |
| Year 5 | $959,061 | $754 | $39,213 | 5.60% |
| Year 10 | $1,313,996 | $812 | $42,244 | 6.03% |
| Year 15 | $1,800,289 | $875 | $45,508 | 6.50% |
| Year 20 | $2,466,552 | $943 | $49,026 | 7.00% |
Rent tells a similar, if gentler, story. A weekly rent of $700 increasing by a modest 1.5% a year — well below typical long-term averages — still grows to around $943 a week within twenty years, lifting annual rental income from $36,400 to roughly $49,026. It isn’t dramatic year to year, but it compounds in the same way the property’s value does.
What the table also shows is the effect of measuring yield against what you actually paid, rather than against the property’s rising current value: because rent keeps compounding while your original purchase price never changes, the gross yield on your original investment climbs steadily — from 5.20% today to 7.00% by year twenty. Measured against the property’s current value instead, that same rent looks like a shrinking yield, simply because the asset itself has grown so much faster. Neither number is wrong; they’re just answering different questions, which is exactly why yield in isolation is a poor way to judge an investment’s long-term merit.
Sarah’s Example
Controlling An Asset Far Larger Than Your Deposit
Sarah has saved $70,000. She could leave it in a savings account, or use it as a deposit to control a $700,000 investment property at 90% LVR, borrowing the remaining $630,000 from a lender.
If that property increases in value by 10%, Sarah doesn’t earn 10% on her $70,000 — she benefits from the growth on the entire $700,000 asset. A 10% increase on $700,000 is $70,000, which is a 100% return on the deposit she actually put in.
That’s the mechanic behind leverage — and it’s also why the quality of the asset matters so much. The same maths works in reverse if the property underperforms or falls in value, which is why leverage should never be treated as a shortcut to skipping proper due diligence.
Good Debt Vs Bad Debt
Not All Debt Is Created Equal
The word “debt” makes many people uneasy, but debt itself isn’t the problem — what it’s used for is. Productive, or “good” debt is borrowed against an asset that has the potential to grow in value and generate income. Bad debt is borrowed against something that loses value the moment you buy it, and generates no return at all.
- Good debt is secured against an appreciating asset — like a well-located investment property
- Good debt is typically offset, at least in part, by rental income from a tenant
- Good debt can come with tax benefits that reduce its real, after-tax cost
- Bad debt is usually secured against a depreciating asset — like a car or consumer goods
- Bad debt generates no income and offers no offsetting tax benefit
- Bad debt simply gets more expensive to hold over time, with nothing growing to offset it
A Necessary Caveat
Leverage Doesn’t Replace Good Decisions
Leverage is a powerful tool, but it isn’t a strategy on its own. It magnifies the outcome of the decision underneath it — so if the asset is poorly located, overpriced, or purchased for the wrong reasons, leverage will magnify that mistake just as readily as it magnifies a good one.
This is why understanding leverage matters as much as understanding your own why for investing, and why we believe in strategy before property — the right structure, applied to the wrong asset, still leaves you worse off.
How It Compounds
Three Components Of Leverage
Used properly, property leverage isn’t just about borrowed capital. It’s the combination of three components working together that accelerates wealth-building well beyond what any one of them could achieve alone.
Using The Bank’s Money
Borrowing allows you to control an asset far larger than your own capital, so growth in the property’s value compounds against the full purchase price — not just your deposit.
Tenant Contributions
Rental income from a tenant helps service some or all of the mortgage, meaning someone else is effectively helping to pay down the loan securing your growing asset.
Tax Benefits
Deductions such as depreciation and holding costs reduce your taxable income, freeing up cash that can be redirected back into your portfolio.
Combined In Practice
Combining All Three For Accelerated Growth
Take a second investment property valued at $800,000, purchased at 90% LVR with $720,000 borrowed. Rented out for $41,000 a year against $20,000 in annual expenses, it produces a positive cash flow of $21,000 — before tax deductions of around $12,000 are factored in, freeing up further funds to reinvest into the portfolio.
On a month-to-month basis, that might look as simple as $3,500 in rent against a $3,000 mortgage repayment — a straightforward $500 of positive cash flow, on top of whatever growth the underlying $800,000 asset achieves. Equity growth, tenant-funded repayments and tax efficiency, working together, is what separates an investor who merely owns property from one who is building a portfolio.
Leverage Magnifies Whatever You Point It At.
That’s precisely why asset selection matters as much as the finance structure behind it — the best leverage in the world can’t rescue the wrong property, and the wrong leverage can undermine a genuinely good one.
Understand Your Own Position First
Is Leverage Right For Your Circumstances?
Everyone’s capacity to use leverage safely and effectively is different, shaped by income, existing debt, risk tolerance and long-term goals. Speak with us to help identify which strategies are the “best fit” for your own personal circumstances and purpose for investing.
Put Leverage To Work, Properly
Whether you’re weighing up your first investment property or your fifth, we’ll help you understand how much leverage makes sense for you — and how to point it at the right asset.
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