Level of leverage in stock investment – General – Forum

Hello everyone,

I have been thinking about this issue for some time … People who buy an apartment, leverage with the mortgage and if at the end of the years they manage to pay the mortgage, the value of the property has not decreased much and the profit (already whether via rent or rent savings) is higher than the mortgage interest, it will have had a good profitability (ROE = Profit / Equity). Therefore, despite being highly leveraged, it will have such a positive return. That is why many people in Spain have done well real estate investment so far.

We also demand some leverage from companies so that the return is higher and we can demand a net debt / EBITDA <3 so that this debt is not a problem.

Well, in the various forums there is always talk of not leveraging when investing in the stock market to have peace of mind… But this is contrary to the thinking we have of a company with payable debt, if we want to maximize profit. At the current interest on the debt that exists right now (1.5% in IB in euros), it means that we would have to get more of that …

It is logical that it depends on the situation of each one (job stability, salary, own capital …)

A couple of civil servants, with a stable job, a net annual income of 50’000 euros per year and with a paid floor (300’000 euros) and a portfolio of shares of 200’000 euros, is not the same as another person with a salary in a company private, of 20,000 euros per year and portfolio of 20,000 euros.

The first pair could leverage more money than the second.

If we compare with real estate investment, I present several cases of leverage:
Case 1:
Couple Salary 50’000 eur per year
Annual savings = 30% of income = 15’000 eur
Own funds: 500’000 eur (50’000 entry for the flat and 450’000 in flat and bag)
Income from own funds (3% per annum): 450’000 x0.03 = 13’500 eur
Mortgage: 200’000 eur 30 years at 1.5%
Annual mortgage expenditure: 8,300 eur
*Leverage level:8’300/(15’000+13’500)100= 29%

Case 2:
Couple Salary 50’000 eur per year
Annual savings = 30% of income = 15’000 eur
Own funds: 50’000 eur for the apartment
Mortgage: 200’000 eur 30 years at 1.5%
Annual mortgage expenditure: 8,300 eur
*Leverage level:8’300/(15’000)100= 55%

Case 3:
Annual salary 20’000 eur
Annual savings = 30% of income = 6’000 eur
Own funds: 20’000 eur to enter the apartment
Mortgage: 80’000 eur for 30 years at 1.5%
Annual mortgage expenditure: 3,300 eur
*Leverage level:3’300/(6’000)100= 55%

Now, with the hypothesis, that we had unlimited access to financing to invest in the stock market, where would you establish the maximum leverage? Based on salary and own funds? Have you read somewhere about this? As long as it is a small, payable leverage and its profitability is greater than the interest of the financing, it could be an interesting option … What do you think?

Likewise in the following post, I try to develop a little more several cases of ROE, ROA and ROCE in real estate investment, since they seem quite interesting to me and we can still develop a little more the level of leverage with little risk in investment in the stock market, to maximize return.

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