BYTHE NUMBERS
LEVERAGE
The Power of Leverage for Investors BREAKING DOWN THE POTENTIAL IN CAPITAL.
by Bobby Montagne
H
ow do aspiring real estate developers get started and then stay successful? There’s more to it than you might think. While finding great deals on properties, moving quickly, and understanding construction costs are all important, true success really comes down to a thorough understanding of financing and leverage. Over the past 10 years, the percentage of financed flips in the real estate industry has been as high as 68.5 percent. Without leverage, far, far fewer flips would get done in the real estate industry. Leverage, or buying properties by taking on some debt, has many benefits. Leverage can: • Enable developers and other investors to get deals when they don’t have enough cash on hand for the full purchase price • Provide higher returns on investment (ROI) than when investors use only their own cash • Allow real estate investors to expand their businesses at
a faster rate than would be possible if all their capital was tied up in deals
USING LEVERAGE EFFECTIVELY ON FIX-AND-FLIP DEALS Flippers use leverage to make flipping more affordable and potentially more profitable. Without it, a flipper must provide 100 percent of a property’s purchase price in order to buy a property. Suppose an investor pays $100,000 in cash for a property and is able to quickly resell it for $110,000. If the investor uses their own funds to purchase the deal, the result is a 10-percent ROI: ($110,000 - $100,000) / $100,000) = 0.10.
10 percent is not a bad return, but an investor might do much better using leverage. The amount a flipper can borrow
104 | think realty magazine :: october 2017
thinkrealty . com | 105
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