The old saying, “Cash is King” has never been more crucial than in the present financial conditions we are encountering. “OPM” (Other People’s Money) is a different well-known phrase that every real estate investor should think about utilizing to create every dollar count when entering a deal. The moral from both expressions should be to utilize the power of leverage. The article to follow illustrates how leverage can stretch the dollar to generate greater wealth when buying Real Estate.
The superior the pool of money the better the investment one can build. Lenders, equity investors (private and institutional) or persons could be the vehicle to supply this pool of funds. One word of caution is the cost of capital relative to the capitalization rate on the project. In the case below, I am going to cite “The Power of Leverage” by using similar cost of capital, just to keep things easy:
An All Cash Buyer – Let us suppose an investor has $1 million to invest and invest a property that yields a ten% gain as well as the investor pays cash for the investment. The Net Running proceeds would equal $100,000 per year.
Dipping in to OPM – Now besides spending $1 million in cash the investor get leverage to as much as 75% of the investment amount. In this instance that will be a loan of $750,000 along with the investor would supply $250,000 in cash. The price tag on capital on the $750,000 for this case is 6%, and when amortized larger than a 20-year amortization age, the yearly debt service on the loan will be $64,478 per year. The net cash flow to the investor would be $35,522 per year, realizing a 14.2% return on your investment. This can be a 4% growth using leverage. Now
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The preliminary criterion was to make investments the $1 million dollars into real estate. Next, I showed you the advantage of OPM. Now, take into account the purchase of many properties. If you buy an average of 4 assets and make use of leverage, a total investment of $4 million dollars will be realized versus $1 million having to pay all cash.
This leads me to my final thought on leverage and also the boost of assets. Granted, nowadays this is non-existing, although over the future there is certainly an appreciation factor realized. Let’s assume a 3% growth factor for the above investments: that’s a $120,000 in value per year on a $4 million dollar investment compared to $30,000 per year in value with the all cash example. OPM and Cash is King. Two essential expressions regarding real estate investment. In remembering the meanings behind both statements and making use the power of leverage, you possibly can aim your good real estate deal into an excellent one.
Another great article by Capitol Hill Calgary Homes. Check here for free reprint license: Leveraging In Commercial Real Estate.