How leveraging works

Leveraging (Other People’s Money) is one of the techniques, most used by billionaires to amass fortune. Sam Walton, Donald Trump, Aristotle Onassis, W. Clement Stone, Daniel Ludwig and number of other tycoons applied this principal to set up their empires.

Financial leverage is using borrowed funds to invest in an industry. Say, for example, an investor borrows 1000$ and invest it along with his own 1000$. Now, if the industry generates 20% returns he would be able to produce 33% return on equity as compared to 20% returns he would have generated without leveraging.

The most famous example of application is Aristotle Onassis who borrowed funds from banks, using future cash flow from his already owned ships as collateral, to build more ships. Although Daniel Ludwig was the founder of this technique but Aristotle Onassis is more famous for its application.

W. Clement Stone also used other people’s money to buy other insurance companies. E.g. he bought the Pennsylvania Casualty Company using funds borrowed from the Commercial Credit Company of Baltimore, which owned the company he was buying.

Financial leverage is a double edged sword. Using it can generate super normal profits in good days but it can play against you, as well, by generating extra losses during recession.

Leveraging may help you to be extra vigilant regarding your business expenses. The liability you have under taken in form of funds and interest would pressurize you to be extra careful in your expenditure and you would move towards cost cutting. It may provide impetus for you to work hard. Fed chairman Ben Bernanke, has compared, adding debt to firm’s capital structure, to putting a dagger to steering wheel of your car.   Dagger- which points towards your stomach- would motivate you to drive carefully but at the same time the risk of damaging yourself is very serious when someone else hits you- even if you are driving carefully.

Investment in Dubai realty sector

Dubai presents lucrative investment opportunities for Asian investors in real estate sector. The proximity of Dubai to these countries along with good rental yields is the main attraction. Moreover, Dubai offers unique opportunity of earning tax free gains.

Furthermore, the deteriorating law and order situation in many of surrounding countries is another reason which boosted Dubai’s property market. Affluent investors from gulf including Syria, Lebanon, Iraq, and other Arab countries have flocked to Dubai.

Investors from non-Arab countries too have benefited from its property market. The data from Dubai Land Department shows that Pakistani investors, during 2015, has invested AED 8 billion in Dubai, which is more than AED 7.588 billion, invested during 2014.

India has topped the list of largest investor. The amount invested by Indians during 2015 is AED 20 billion which is more than AED 18.123 billion, invested by Indians during 2014. 

Burj khalifa

UK citizens are second largest investors in Dubai’s property market. The amount invested by U.K. investors, during 2015, is AED 10 Billion. Previous year investors from U.K. invested AED 9.318 billion.

The improvements made by UAE Govt., after 2008 crisis, helped build investor confidence. Steps like increase in property transfer fee sidelined speculators. Furthermore, Escrow account added another layer of security for genuine investors. 

Benefits of investing in REITs

REITs (Real Estate Investment Trusts) are companies that pool funds from investors. This fund then is used to own or finance income producing real estate. Owing shares in REITs allow you to reap all benefits of owning property along with some other advantages.

These benefits include

Investing in small amounts

For average joe to purchase property in Karachi or Islamabad isn’t possible. It may take years in saving to buy a small piece of land. But by purchasing shares in REIT you can start owning property with as less as 5000 rupees.

Collection of rent and maintenance services

 When you own the property you have to maintain the property and collect the rent. If you own more than one property then managing them and collecting rent would be a lot hectic. With REITs you can collect your rents in the form of dividends. Furthermore all the maintenance functions are to be done by your REIT.

Diversification

If you have small amount to invest in real estate, you cannot buy a number of properties which can diversify your risk. Diversification for REITs is possible owing to their huge funds, hence; you can be a lot secure when you invest through REITs.

Professional management

REITs charge you for their professional services.  The management makes sure that risk and rewards are balanced.

Economies of scale

Purchasing and managing properties can be very costly. REIT owns a lot of properties. In this way they can spread fix costs over a large number of properties, hence reduced per unit costs for you.

Availability of loans

In developing world taking loans from banks is a problem. REITs can take loan from banks easily if they have good credit rating. This enables them to make leverage purchases, hence high dividends for you.

Less risk of fraud

With professional management the risk of fraud is minimized. Defective titles and encumbrances are now not your problems, but your REIT will take care of them.