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 bigger the pool of money the better the investment one can make. Lenders, equity investors (private and institutional) or individuals may be the vehicle to supply this pool of funds. One word of warning is the price of capital relative to the capitalization rate for the project. In the example below, I am going to cite "The Power of Leverage" utilizing the same cost of capital, just to keep things undemanding:
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 instead of paying out $1 million in cash the investor gain leverage as much as 75% of the investment amount. In this case, that will be a loan of $750,000 and the investor would supply $250,000 in cash. The cost of capital on the $750,000 for this case is 6%, and when amortized larger than a 20 year amortization stage, the once a year debt service on the loan could be $64,478 per year. The usual cash flow to the investor would be $35,522 per year, realizing a 14.2% return on your investment. It's much 4% increase using leverage. Now
Arrives the Fun Part - If you are looking to get much more inspiring you are able to put in back in the principal sum you give on the loan ($20,000-$25,000 each of the first 5 years of the loan) and now the adjusted annualized return equals generally 22%! This is in excess of twice over the particular profit 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 finishing thought on leverage and also the boost of assets. Granted, at present this is non-existing, on the contrary over the long run there is certainly an increase in worth factor realized. Let's assume a 3% appreciation 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 very important expressions in relation to real estate investment. In remembering the meanings behind both statements and using the power of leverage, you possibly can direct your good real estate deal into an awesome one.
The bigger the pool of money the better the investment one can make. Lenders, equity investors (private and institutional) or individuals may be the vehicle to supply this pool of funds. One word of warning is the price of capital relative to the capitalization rate for the project. In the example below, I am going to cite "The Power of Leverage" utilizing the same cost of capital, just to keep things undemanding:
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 instead of paying out $1 million in cash the investor gain leverage as much as 75% of the investment amount. In this case, that will be a loan of $750,000 and the investor would supply $250,000 in cash. The cost of capital on the $750,000 for this case is 6%, and when amortized larger than a 20 year amortization stage, the once a year debt service on the loan could be $64,478 per year. The usual cash flow to the investor would be $35,522 per year, realizing a 14.2% return on your investment. It's much 4% increase using leverage. Now
Arrives the Fun Part - If you are looking to get much more inspiring you are able to put in back in the principal sum you give on the loan ($20,000-$25,000 each of the first 5 years of the loan) and now the adjusted annualized return equals generally 22%! This is in excess of twice over the particular profit 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 finishing thought on leverage and also the boost of assets. Granted, at present this is non-existing, on the contrary over the long run there is certainly an increase in worth factor realized. Let's assume a 3% appreciation 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 very important expressions in relation to real estate investment. In remembering the meanings behind both statements and using the power of leverage, you possibly can direct your good real estate deal into an awesome one.
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Another great article by Downtown Listing. Free reprint available from: Real Estate Investing: The Power Of Leveraging.
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