Leverage – Video

When it comes to investing in real estate — what’s your definition — understanding if you will — of leverage?

 

Transcript:   Hi, Jeff Brown here. You know me as the “BawldGuy”. Today, we’re going to talk about something very simple and one of the most misunderstood concepts in real estate investment, and that’s leverage. Leverage is not how much you put down primarily, everybody wants to think that it is. The lower the down payment, the better leverage you have. Whoopee! That’s not the case. Here’s what real leverage is to the investor who actually knows the concept. That is this. If your borrowed money is 4.5% cost and your overall return is 6%, you have positive leverage. Whether you did that at 10% down or 50% is relevant only after the fact of establishing that the leverage is positive. If you had a leverage factor where your borrowed money was 6% and your overall return was 5% whether you had 0 down or 90% down, you’d have negative leverage and, of course, a break even on the cash flow, more or less, is going to be considered neutral leverage; say 5% cost, 5% overall return, it kind of comes out in the wash. The idea is this, stop basing the quality of what you’re doing on your down payment size. Size matters only after you’ve declared that you have positive leverage based on objective and brutal analysis of the facts, and things you can prove empirically, numbers wise. Leverage is of three kinds; positive, negative, and neutral. Positive is your yield is higher than your cost of money. Negative is your yield is less than the cost of your money, and neutral becomes self explanatory. The idea is to understand the difference between what real investor leverage is, and it’s not down payment. Thanks for joining me today. We’ll catch you next time. Bye-bye.

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About BawldGuy

I'm second generation real estate, first licensed in fall of 1969. Having been mentored by several iconic brokers, I'm also CCIM trained, having completed all 200 hours back in 1980. Have successfully executed well over 200 tax deferred exchanges, many of which have been multi-state in nature. Strong points are analysis and the creation and real world application of Purposeful Plans employing several strategies synergistically. The idea is to arrive at retirement with the most after tax income possible, backed by the largest net worth.

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2 thoughts on “Leverage – Video

  1. Ben Leybovich

    This is fantastic Jeff. It’s like you red my mind – I am working on an article for BP blog relative to this subject. I buy with as close to 100% leverage as I can muster, but that’s only if the yield is so strong that I am able to realize substantial CF even under high leverage. It amazes me how often investors “buy CF” with down-payments. That’s completely backwards. You said it differently, but we are thinking the same thing…

    It is a pleasure to listen to your thoughts.

    BTW. I shared this on http://www.facebook.com/JustAskBen

    Reply
    1. BawldGuy Post author

      Hey Ben — Glad you liked it. I’ve stayed far away from 0-down transactions, and guided clients far away from them. However, I do know that many who’re experienced and knowledge have indeed used that approach with positive results. I’m just too OldSchool to adopt that strategy.

      Reply

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