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The Power of Leverage
Most real estate transactions are leveraged. In other words, the purchaser is using a combination of their own cash with the balance coming from a bank in the form of a mortgage. It is often overlooked how important leverage is and why it is such a critical tool to build wealth. Your dream home may be out of reach now, but with a small real estate investment today, you will be well on your way to use leverage to work your way up the property ladder.
Here is how I turned $10k into $415k in only 6 years through the power of leverage:
I purchased a side-by-side duplex in 2012. My wife and I lived in one side and rented out the other. I used an FHA loan to purchase at $362,000, so I had to come out of pocket $12,670 as a down payment. At the time I purchased, both units were rented and I didn’t move in until 60 days after we closed. By the time we moved in I was out-of-pocket about $10,000 accounting for the collected rent.
Fast forward three years. My wife and I decided it was a good time to buy a new house with a little bit more yard and a bit more square footage. Since buying the duplex, we saw a lot of appreciation and we were able to pull out about $50K in cash via a refinance. We then used that cash as the down payment to purchase the house we currently live in. Fast forward again to today and we have a total value for both properties of about $1.25MM, and we owe the bank about $835K. If we were to sell both properties, we would walk away with $415K (not accounting for Realtor commissions, closing costs, etc. Luckily I know a great Realtor!).
Through the power of leverage, I was able to take $10K and turn it into $415K in six years. Not a bad return on investment! This demonstrates why it is so important for folks to get on the property ladder and how a person can grow significant wealth through real estate. Call me today and lets put a plan together to get you on a similar fast track to wealth!
I suppose this would be a good time to share a song I wrote back when I was shopping for my duplex. Enjoy!
Changing Markets Create Opportunities
There is a fundamental shift happening in the Portland real estate market where marketing times are expanding, buyers have a few more home choices (and time to think about those choices), and to get top dollar sellers have to rely on full-service agents to properly market their properties and reach the most buyers. The days of putting a sign in the yard and bragging about 12 offers in three days are over.
As the market shifts, opportunities arise. Right now is a great time for real estate investors to evaluate their current position. One metric that is still solid is prices. An owner’s investment property is worth more now than it ever has ever been worth. In this type of market, it is often a good idea for investors to consider a less is more strategy to increase cash flow.
Less properties can equal more cash flow?! Why yes, that is precisely what I am saying. Let’s take a look at this example:
An investor owns ten houses worth $350,000 each and owes $150,000 on each of those properties. That is $2 million in equity. Say that investor’s monthly cash flow (after expenses and debt service) is $600 a month on each property for an aggregate cash flow of $6,000 per month. That investor hires us to sell five of those homes for top dollar allowing them to pay off the five homes they still own which means they now have five houses free and clear worth $1.75 million. Without any mortgage payments, the investor’s new monthly cash flow would increase to $1,450 per unit or $7,250 per month. That is a 20 percent increase!
As investors ourselves, we always have strategies for our investor clients to maximize their returns. Call us today for a free consultation!
When is the Best Time to Buy?
The best time to buy is usually a year before you actually purchase something. The reason is that the greatest strategy to build real wealth in real estate is to buy and hold for a long period of time. It is almost a sure bet and below is a chart that I think really illustrates my point.
Let’s say a person purchased a hypothetical property in 2005 for $100,000, cash. This was the beginning of the run-up to the market peak and based on data from RMLS for the Tri-County area, by August 2007 that property would have seen a peak value of $137,184 and that buyer was feeling groovy.
Then we saw a total market crash and that same property’s value fell to $97,825 by March 2012. So that buyer is now super bummed, stressed, and feeling far from groovy. In their mind, they have now lost $39,359 in equity. But chin up! They actually only lost $2,175 in equity (purchase price minus current market value). And in terms of actual cash, they have not lost anything since they have not sold the home.
Today, this same house is now worth $180,449. This is 80% above the original purchase price, or about 4.6% annual appreciation. They feel groovy again! Even the folks that purchased at the peak of the bubble in 2007 are feeling groovy!
Current market fundamentals are strong. 30,000-40,000 people are moving to the metro area every year and we are still behind delivering new units since we had essentially zero new inventory during the lean years. On top of that prices are still increasing faster than historical averages and inventory is tight. So my answer to “when is the best time to buy?” Its when a person has their finances in order and are ready to call Carmel and me. Good ol’ fashioned time is the greatest hedge against market instability.
