The old saying, "Cash is King" has never been more essential than in the current economic circumstances we are experiencing. "OPM" (Other People's Money) is another common phrase that each property investor should consider using to create every dollar count when entering a transaction. The message from both expressions is always to employ the power of leverage. The article to follow illustrates how leverage can stretch the dollar to bring about greater wealth when paying for 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's assume an investor has $1 million to invest and invest a house that yields a ten% earnings as well as investor pays cash for the investment. The Net Running takings 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
Comes the Fun Part - If you wish to get even more creative you'll be able to add up back in the principal amount you compensate on the loan ($20,000-$25,000 each of the first 5 years of the loan) and now the adjusted annualized return equals more or less 22%! This really is a lot more than twice over the particular gain from paying cash for a property.
The preliminary criterion was to make investments the $1 million dollars into real estate. Next, I showed you the good thing about OPM. Now, take into account the acquiring of many properties. If you purchase an average of 4 properties and operate leverage, a total investment of $4 million dollars will be realized versus $1 million paying all cash.
This leads me to my final thought on leverage and the increase in worth of assets. Granted, nowadays this is non-existing, on the contrary over the future there's a growth factor realized. Let's anticipate 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 crucial expressions with regards to real estate investing. In remembering the meanings behind the two statements and utilizing the power of leverage, you'll be able to turn your good real estate transactions into an ideal one.
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's assume an investor has $1 million to invest and invest a house that yields a ten% earnings as well as investor pays cash for the investment. The Net Running takings 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
Comes the Fun Part - If you wish to get even more creative you'll be able to add up back in the principal amount you compensate on the loan ($20,000-$25,000 each of the first 5 years of the loan) and now the adjusted annualized return equals more or less 22%! This really is a lot more than twice over the particular gain from paying cash for a property.
The preliminary criterion was to make investments the $1 million dollars into real estate. Next, I showed you the good thing about OPM. Now, take into account the acquiring of many properties. If you purchase an average of 4 properties and operate leverage, a total investment of $4 million dollars will be realized versus $1 million paying all cash.
This leads me to my final thought on leverage and the increase in worth of assets. Granted, nowadays this is non-existing, on the contrary over the future there's a growth factor realized. Let's anticipate 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 crucial expressions with regards to real estate investing. In remembering the meanings behind the two statements and utilizing the power of leverage, you'll be able to turn your good real estate transactions into an ideal one.
