Increasing Residential Real Estate Returns Through Leverage
Leveraging, or using borrowed capital to increase the return on an investment, is an excellent way to maximize your buying power. Itís also a great way for investors to minimize their risk. Check out our real-life example of leveraging in residential real estate.
Leveraging is defined as using borrowed capital to increase the return on an investment. We leverage our investorsí money through private placement funds in order to maximize returns and minimize risk. Leverage is a powerful tool and Iíd like to give you an example of how it has worked for us.
Letís say you have $1 million to invest. If youíre able to buy houses at $200,000, and accounting for closing costs and rehabbing, you could purchase four properties and have maybe $100,000 left over. Youíd be using virtually all of your cash instead of leveraging your risk.
On a single $200,000 house, the return is just not that great. Hereís the price breakdown: Acquisition of a $200,000 house costs about $209,000. On the other side, when you sell it, the residential resell is going to give you a net of about $248,000.
Figuring in rehab and construction costs (at roughly $15,000), youíre looking at netting about $21,000. Thatís a cash-on-cash return (which is determined by the annual dollar income divided by your total dollar investment) of about 10%, because you would buy $200,000 worth of inventory after your costs of $209,000. So, you dump from your wallet $209,000 and youíre going to get $21,000 back. Honestly, if it were my own money, I wouldnít think it was worth it. Iíd be putting $209,000 at risk to get back $21,000? Itís too risky.
So what we do -- we leverage it. Now, when we say leveraging, weíre not talking about leveraging risk like the Wall Street people were doing a few years ago. They were incredibly overleveraged, which led to our economic mess. In fact, weíre talking about risk with a tolerance that is going to protect you in case there is another collapse in the real estate market.
The way that looks is like this: We control the money in our private placement fund and we leverage that money. We want to use the least amount of the capital so that our cash-on-cash return is maximized. We leverage the money with a loan at 65%. So we end up with a loan at around 46% of the actual market value of the property.
At 46 cents on the dollar, your investment is pretty safe. I donít see the market crashing 50 cents on the dollar in order to lose all of your equity. So by using leveraging in residential real estate, weíre able to turn that $1 million into over $2 million. From these residential flips, the net profit that is generated as you turn over properties is put back into the fund, and the cycle begins again. Thatís how we acquire properties.
Thatís what we do. We do this throughout the United States. We leverage our money. We maximize our purchasing abilities by extending the amount of purchasing power we have and we lower our risk. We do not want to put all of our eggs in one basket.
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ABOUT THE AUTHOR
Luis Roque invites you to learn to earn high and even INFINITE returns investing in commercial real estate with a group (on money you used to have sitting in pathetic CDs at 4% or less) when you become a Select Member with America's #1 Real Estate Network today! Join us for an upcoming educational presentation online to get information or to get started now: Real Deal Commercial Webinar.