Ever wondered how people start with buying one investment property, and then a few years later are able to buy another, and then another? It comes down to using a thing called ‘leverage’, and while it is a simple concept in theory, it does have its risks. So is it something you should do?

What is leverage?

Leveraging is the concept of borrowing capital in order to make an investment, in which it is predicted that there will be a greater return from the financial contribution in the future.

When it comes to property, investors use the equity they already have in one home as a deposit, and then they approach the bank for further lending, in order to secure another mortgage.

Anyone who has a home will have a certain amount of equity - how much they actually own and what they still owe the bank. So if you put down a $80,000 deposit initially but have been paying a mortgage for 20 years - then you will certainly be a significant way through paying off your loan. Not only that, but the house would have increased in value over that time, which means you will have a much lower LVR (loan-to-value ratio).    

How much you could borrow for another mortgage will depend on many factors, but the main ones will be - the amount of equity you currently have in your home (or other investments), and that you will be able to ensure your mortgage is the same, or less, going forward.  

Why do people do it?  

Leveraging equity provides people with the chance to invest straight away, without having to save for the next five to ten years in order to produce a deposit of 10 to 20 per cent.

Over this time, property values would have gone up yet again, and an opportunity might be missed by waiting to make the move into investment - particularly as interest on your savings would be less than that of property inflation.  

And this particular point is why people are keen on the concept of investing in property - because, done right, it has the possibility of reaping far greater financial rewards than if the same amount of money was left in say, a term deposit.  

Read more: Top 6 property investment myths - busted! 

Is there an element of risk?

Investment always has an element of risk, no matter if it seems straightforward. So of course, essentially using your home as collateral for the bank, could be seen as a risky move by many. But it is what investors do on a daily basis - it just needs to be carried out with a solid understanding of everything involved in the process.

The main point that needs to be covered is whether or not you can service two (or more) mortgages, because while you may be able to get the deposit covered by using cash equity, there will still be the matter of a paying for another loan.

This is where some people get into trouble, in that they rely too heavily on the income from one investment to pay for another. And if there is an issue with one property (it is vacant, or the rent is going towards urgent maintenance), then it could jeopardise the payment of another rentals’ mortgage.  

Anything else to know?

Leveraging property equity to grow your investment portfolio is a well trodden path in the world of real estate. But by no means should you ever feel like it is the only way to get ahead.

You should undertake plenty of research by speaking to a variety of experts (particularly those with impartial views) and get a greater understanding of what is involved to ensure it is a success.

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