Real Estate Leverage

 

Do you want a little leverage with that?

Average rates for a 30 year fixed mortgage are 3.75%, but most real estate purchased in southwest Florida is paid for in cash. Nationally 43% of homes are purchased for cash, and I suspect the number locally is closer to 70%. This is occurring even when returns on investment portfolios run 7 to 10%. Then why are most real estate purchases cash?  Confidence and prior experience in the 2006-2008 is the short answer and add lack of confidence in the stock market and you have most of your answer. Most investors believe that real estate should be part of their portfolio but don’t have enough confidence to get leveraged. 

Leverage is a wonderful thing however, and I urge buyers to consider taking advantage of the low cost loans currently available while real estate prices are still attractive

LEVERAGE in Florida Real Estate

I received a call from an investor interested in buying real estate here in Southwest Florida. We talked about apartments, land, REOs and foreclosures and real estate investing in general. Then we got to the topic of leverage. I told Victor that the real estate properties he could buy with 10% leverage were better than deals he would have to put more cash into. I realize that most of us think we know what leverage is. What I would like to do, however, is get pretty basic and review just what leverage can do for you in real estate. This kind of leverage is almost impossible to get in other investments. In mechanics, a lever is a device that will enable you to move a large or heavy weight with a very small force. Leverage in real estate enables you to control an expensive piece of property with a small amount of cash. First, let’s examine a property you might buy with no leverage. Let’s further assume you buy a $100,000 condo. For simplicity's sake, let us also assume that there were no other costs in acquiring the property. Our third assumption is that the property increases 10% per year in value (appreciation). You buy the property on January 1 by investing $100,000. On December 31 the condo is worth $110,000. Your investment has earned you 10%. If you are able to rent that property out for $1000 per month, and we assume expenses of $167/month, we have additional income of $10,000. Now our investment earned a total of $20,000. For example:

 

Annual appreciation                                       $10,000 

Gross income: 12 months x $1000=                 $12,000 

Expenses                                                       -$2000

Our net benefit                                               $20,000


Without looking at any tax advantages we have earned $20,000 ($10,000 appreciation and $10,000 income) or 20% on our $100,000.
This is pretty good!

Now let’s see how leverage works. Instead of paying cash for the $100,000 property, let’s put up $20,000 and borrow the rest.

 

Annual appreciation                                       $10,000 

Gross income: 12 months x $1000                   $12,000

Expenses w/o interest                                     -$2,000

Interest expense for $80,000, 7% loan

for 12 months is                                              -$5,574

Our net benefit                                               $14,426

In the leveraged, example we earned $14,426 on our $20,000 investment. This is a return of 72%! Versus 20% for the un-leveraged acquisition (I used twice the current cost of money!) This is what leverage is all about.  Now keep in mind we have not even considered that you are paying the mortgage down ($813 the first year) or the depreciation that you can write off ($2909 the first year). This would make the levered deal even better.

 

 

 

Hot topics:

 

Oasis Condos -will be announcing incentives for the last 12 condos available next week. I can get you the deals now. The developer would like to get out of the project by the end of this season and is set to make deals. If you have been considering buying a waterfront condo but thought all the deals were gone, Email or call me. The deals are real and the pricing incentives are attractive.

 

New Homes - Market America Realty and Investment Group Inc, through Market America Development will be building two new homes off McGregor Blvd. One is already sold, but we have not begun to market the 2400sf pool home across from the Golf Course on Olmeda – message me for details – pricing will be $499,000. Completion before next season, you can pick out the finishes.

 

Flex Space - We are now offering pre-construction prices as low as $112,000 for 1200 square foot flex space condos on Taylor Road in Punta Gorda: Man Caves, car storage, small business – call me for details. Units are renting for $900/month. Email me for details.

 

 

On a personal note, I want to thank you all for your support and patronage over the years. I started this newsletter in 2001 We now have over 30,000 subscribers to our newsletter.  I will be actively working with clients again as an agent, something I missed over the last two years. I’m listing and selling homes and investment priorities, building, and developing and doing personal investment consulting. Nils Richter and I, along with Mike Bennett and Jerry Miller have formed a core team of professionals with a laser focus on our client’s goals and real estate.  I will be sending you more information on our opportunities, but if you would like to set up a consultation to discuss your real estate investment goals, please email me or one of our team.

 

Gregg  gfous@marketamericarealty.com  239-851-5464