The power of leverage in real estate

[travelpunk]

Understanding this is crucial if you want to become an ultimate real estate investor (or really any kind of investor).

This is the ability to create great profits by effectively controlling large amounts of other peoples money (investors, banks, the seller, etc...).


Here's a couple of examples to show you the difference in purchasing property with cash or leveraging OPM (other peoples money).


#1- Let's say you deplete your savings or 401k and purchase a property for $200,000 ALL CASH. It appreciates fast and within a year you sell it for $300,000.

You made $100,000 in profit, which translates to 50% on your money. Not bad.


Now let's look at the same situation using leverage.


#2- As an investor, you purchase a property for $200,000. You're an investor so you acquire it with little or none of your own money down and the seller carrys the financing (you make monthly payments to him), and pay him off within a couple of years by either refinancing or selling the property.

Or you get 100% financing from a bank/mortgage lender, still allowing you to buy the property with nothing down.

It appreciates and you sell it for $300,000.

After paying off your old mortgage of $200,000 you're left with $100,000.


What is your return on investment in this scenario? 50%? Nope. Your return is infinite.

Even if you sold it for a $50,000 profit, your return would not be 50,000%. It is greater because you came in with none of your own money.

That makes your return on investment infinite!




Compare it to the stock market.


Let's say you have $10,000 and invest that in the stock market and buy 1,000 shares of a $10 stock. (1,000 shares x $10 each= $10,000 total investment)

You watch the stock, it does great and in one year your stock goes from $10 to $25! Yippeee! That's a hundred and fifty percent (150%) return on your money. not bad at all.

Hopefully, you have $10,000, and you chose the right stock though...


If you can see the power in leverage and you use it to your advantage, you can create a very nice portfolio and perhaps...never have to work for anyone ever again....

[TheJake]

So once again I go back to notes. Start a thread on notes tony. Tell us how to do that. That's where I want to start.

[PlayPal]

And it sounds so easy....

[LiveFreeorDie]

It can be easy BUT:

1.) You need the right market and to know the market. A depressed market usually makes for at least a few desperate sellers who will carry a note for a few years, particularly if they HATE being a landlord and want to get out- BUT, that means you probably can't count on immediate returns in one year necessarily. You also need a market where rents from your property will service the debt. Not all markets are created equal.

2.) You need to understand the various financing vehicles available and be able to model the cashflow of the property.

If you can get a handle on those areas, it can be done. It is not rocket science, but it is daunting to a lot of people until they try it.

[voyd]

Here's my .02 skinny on real estate investing IMO:

1) If you are in a hot "bubble" market like the WC - just FLIP 'EM. You don't really care what your mortgage, interest or terms of your loan are - because you won't be hanging onto the property very long anyways.

2) If you are in a sloow market though, it would take you about 5 years for the value to appreciate just to cover the seller's costs and break even alone. So, flipping properties won't really be an option. It becomes a longer-term investment, or an alternative to losing rent. Now, you must get a good low-interest loan, which generally requires a bigger down. However, you could still make decent money in the meantime by renting out the place or a room (assuming you're willing to live with a roomy).

3) If you are a good handyman with a LOT of spare time, you could buy fixer-uppers, fix and flip 'em, even in a slow market.

[travelpunk]

The key thing that all the big real estate moguls teach their students to do (Raobert Allen, Russ Whitney, Ron Legrand, Carlton Sheets, Robert Kiyosaki, etc...) is always make money going into the deal. Don't buy for appreciation, buy for cashflow.

That is to say, that most of the offers you will be making will be at 70%-80% loan to value. If you don't get in at that percentage, you better have great terms. Price or terms or you don't do the deal.

Regardless of market conditions, you're protected. Should the market decline, you will still be in an equitable position. And rents should always cover the mortgage and then some.


Right now, there are so many people who are dumping their properties in former hot markets for way below appraised value and then selling them for less than their asking price too, many with massive incentives. These were people who bought for appreciation and not for cashflow.

All the Bubble means to trained real estate investors, is that wealth is being transferred .

We're working with a guy here that has over a hundred foreclosures that he bought in Detroit over the past 2 years. He negotiated all of these from Fannie Mae directly and is still doing it. He averages $200 in cashflow from each house every month. That's a positive cashflow of over $20,000 a month with 20% in equity still! Regardless of any appreciation at all in the future, rents do increase yearly.

We're are actually on a list to buy some from his pipeline. He's doing the same in about 3 other cities right now.

The real trick is to get mixed into the investors crowd. They all go to the same cities and pump them up, and when the masses follow them, it's too late. When the masses are buying, the investors are selling to them (ie Las Vegas, Phoenix, Riverside, Miami, etc...).

Without investors, there is no market. These guys come in, buy and flip and set the comps in the area.

So many crazy deals out there, so little time.....

[voyd]

^ Great points with cashflow and staying with the investor pack...

I sooo should rent out my spare bedroom right now...but dammit I love living alone!!! And hard to find clean, tidy people..

Anyways, know of any other hot "next" investments...like dot-b0mbs, now real estate...so what's next? I want in on the next groundfloor for once!

[LiveFreeorDie]

Anyways, know of any other hot "next" investments...like dot-b0mbs, now real estate...so what's next?[/b]

Flubber

[SuDz]

<div class='quotetop'>QUOTE(LiveFreeorDie @ Aug 9 2006, 11:55 AM) [snapback]134317[/snapback]</div>

Flubber
[/b]

If your interested, I know a guy who can really get you a huge dicount on Flubber.

SuDZ

[IDDQD]

Buy in Edmonton. Itll be just like Calgary.

[travelpunk]

What are the average prices there for condos and houses in good areas of town?

[simply_angelic]

This thread sounds exactly like book my dad once made me read...

[travelpunk]

Would that be "Rich Dad, Poor Dad?"

[simply_angelic]

Actually, I think it was a couple but that does sound familiar...yeah that was one of them