Tag Archive for: leverage

Understanding Leverage in Real Estate Investing

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Building wealth is all about leverage in real estate investing. But what exactly is it, and how can you use it correctly?

If you look at investing, it’s all about using other people’s money. It’s all about leverage. 

Understanding leverage and using it correctly, is the key to unlocking the profits of real estate investing.

Why Leverage Matters

Leverage is the term we use for using someone else’s money (typically in the form of loans) to make a profit for yourself.

Frequently, you will also use a small amount of your own money. But leverage—the opportunities you can access with external funds—is what makes real estate investing accessible regardless of your personal wealth. 

Additionally, leverage allows investors to enter the market quickly, without needing to wait 5 years to save up for a downpayment.

If you know how to get money from others and use it to strategically turn a profit for yourself, you’ll be able to build income out of nearly nothing. 

Different Kinds of Leverage

Leverage comes in many forms:

  • Financial gifts
  • Loans
  • Mortgages
  • Liens
  • And more!

The most common form of real estate leverage is probably a classic mortgage. However, how you use that mortgage (and what you look for in a property) can make all the difference.

Looking for undervalued properties that owners are looking to sell quickly typically maximizes the ARV (After Repair Value). By getting a mortgage to cover the cost of the purchase price and leveraging those funds, you can fairly easily increase the value of the property and turn a profit on the resale (or rental).

Additionally, if you’re looking to buy a property that’s appraised under the market value, lenders are more likely to cover 100% of the purchase price (and sometimes a large piece of the renovations as well). 

How to Start Building Wealth as a New Investor

1. Don’t let emotions take over your investing.

Investing is all about the numbers. Don’t give up when things are moving slowly, and don’t overextend yourself by becoming greedy. 

Be strategic at every level—from the properties you pursue to the contractors you use.

2. Be persistent.

You don’t need $500,000 in savings to make your first deal. You just need to be a doer. This business is all about grit and follow through. 

3. Look for the right leverage.

Not every loan is going to fit your needs. Once you have a property or project in mind, look for leverage that specializes in those areas. 

Do you need DSCR? Have you considered the BRRRR strategy? What about hard money?

4. Run through examples with an expert.

Both at The Cash Flow Company and Hard Money Mike (our sister company), we want you to feel confident and educated.

One of the first things we do when new investors come to us is sit down and run through some sample properties. This helps you understand the different fees you should look out for. 

Different areas have different fees, regulations, and options, and talking to an expert can greatly benefit you as a new investor.

5. Dive in.

The only way to start building wealth is to, well, start. 

It’s typically easiest to begin with a straight-forward fix-and-flip. But be on the lookout for properties of all kinds. Check your area every day and get in contact with realtors or wholesalers. 

As a new investor, it might take you a few tries before someone takes you seriously, but you need to go for it.

6. Commit to the business.

Real estate investing (even if you see it as a personal hobby) is ultimately a business. Don’t cut corners or only renovate with the cheapest fixtures. Every choice you make is an opportunity to build a good reputation.

Be thoughtful and hold yourself to a high standard.

Fight Fear with Knowledge

One of the biggest struggles new investors face is fear. 

It can feel like a huge leap to jump into the investment game, and learning is a great antidote to those nerves. 

One of our goals as a company is to make investing accessible and less frightening through education. Our YouTube channel provides free lessons that walk you through the different aspects of real estate investing. 

Getting started can be daunting, but if you take the time to educate yourself, find a mentor, and find leverage, you have nothing to fear.

How Far Can Leverage Take You?

In the current market, successful investing over the next few years is likely to have a huge payoff. 

Many real estate investors are even able to accumulate hefty retirement funds strictly through real estate investing in addition to annual income.

There are so many strategies you can use to build income with leverage:

  • Fix and flip (buy, fix, sell)
  • Renting (buy, fix, rent)
  • House hacking (buy, fix half, rent fixed half, fix other half with income from first half)

Even new investors can make quick progress if they use leverage wisely.

Recently, we had an investor from a smaller community who has already purchased 8 properties this year with little-to-no money down on each. They’ve been refinanced, rented, and are building her income. By the end of the year, she’ll probably have purchased anywhere from 10-15 properties. And she’s accomplished this by using other people’s money.

Of course, some markets are harder to work in and some communities move a little slower. 

But if you are committed to the game, and you pursue the best loans, you can build a successful business without emptying your pockets.

It’s all about finding the right leverage and using it wisely.

We’re Here to Help!

We have so many tools and resources designed specifically to help you on your investment journey.

We’re happy to help you find the right properties, loans, etc., and we’ll help you feel confident about your decisions.

If you’re interested in discussing a loan or you simply want to talk to someone who has been in the business for a long time, reach out to us at Info@TheCashFlowCompany.com or fill out a contact card.

Getting started as a new investor can be daunting, but with the right knowledge and the right leverage, there’s nothing holding you back.

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Create the Best Leverage for Your Real Estate Investments

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BRRRR is all about leverage. So how can you arrange the best leverage for these real estate investments?

We’ve helped clients with the BRRRR process for over 20 years. What’s the biggest error we see people make?

They don’t start with the end in mind. So they don’t maximize their leverage.

Many beginning investors take the order of the BRRRR acronym literally. They buy, rehab, rent, THEN try to figure out what the refinance will look like. That’s actually doing BRRRR wrong.

Going into the refinance blindly is not how you get the best leverage for your real estate investments. At best, you won’t know how the property cash flows. At worst, you can’t get a refinance loan at all.

Let’s look at what you need to do instead.

Prepping for the Best Leverage for Your BRRRR

Does it make sense to buy a property (with a higher interest loan), put all the money into repairs, rent it, and THEN figure out whether it’s a good or bad investment?

It takes just a little time and effort up-front to figure out if you can get the best leverage for the property.

We like to call this time up-front “building your BRRRR buyer’s box.” It’s a process that helps you prepare for the refinance ahead of time so you don’t do BRRRR wrong.

Going into a property, you should know:

  • Your max LTV
  • Your cash flow minimum
  • What rehab budget you can afford
  • How much cash you’ll need to bring in.

Creating the Best Leverage for Your Real Estate Investments.

Download our free BRRRR Checklist to understand the numbers of your refinance. Make your rental property a success.

Leverage determines whether you’ve done BRRRR wrong or right. All real estate investing hinges on leverage, and our goal is to help you create the best leverage possible. 

Using the right debt will accelerate your business, while the wrong stuff will slow your investing career to a halt.

Read the full article here.

Watch the video here:

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4 Real Estate Loans You Need To Leverage Deals

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You use real estate loans to leverage deals, but which loan is best?

You should have one goal with leverage: maximizing cash flow on your investments.

There are 4 main types of real estate investing leverage:

  • Hard money
  • Bank financing
  • Hedge funds
  • OPM

But where do they each fit? How can you tell which type of leverage is right for your deal?

It depends on what your particular deal needs most to succeed – speed, low pricing, flexibility, or a little bit of everything.

Speed with Hard Money

What if you have a great deal, but you’re required to close in 5-7 days? In that case, you need hard money.

You’ll meet sellers in your real estate career who just don’t want an extended closing. These sellers would rather you close quickly – and they’ll give you a better deal on the price if you can do it. Sometimes, taking too long to secure your financing can get you kicked out of a deal.

You can call your hard money lender and get leverage fast. There’s no hold-up for an appraisal or trudging through a lengthy underwriting process. Hard money is specifically designed for real estate investing.

Real Estate Loans to Leverage Deals for Every Investor

Even seasoned real estate investors, who do dozens of deals every year, still require hard money from time to time. Every investor runs into deals where they need to close quickly. Whether it’s because your bank won’t be ready in time, you’ve maxed out your line with your hedge fund, or some other unexpected circumstance, you need a hard money lender in your portfolio for speed.

Fast closing can capture a lot of equity on a property. Despite hard money being one of the most expensive forms of leverage, purchase price savings on a quick close can far outweigh the cost of the loan.

Pricing with Banks

If hard money is for speed, then banks are for price.

Finding a bank that loves working with real estate investors is a valuable weapon. If you can build a relationship with the right bank, you can get a better rate and a better closing cost.

Some circumstances when you’d benefit from getting your leverage from a bank include:

  • Whenever you have the time to close. If you can afford to wait for appraisals and underwriting, your loan costs will be much cheaper.
  • If the rehab work will take longer than 6-9 months. When you close on a flip with hard money, you need to complete construction on the property within a month or two. If you use a bank loan, you can afford to spend longer fixing up the house.
  • Any time you want more cash in your pocket! Banks have half the interest rates of hard money lenders. Lower rates and fees mean more money in your pocket by the time your property sells.

Flexibility with Hedge Funds

You might find yourself in need of a lender who is more flexible than banks, but still has an “unlimited” cash supply. In that case, hedge funds will have the right leverage for you.

Hedge funds are also known as capital funds or private equity. These are firms that can fund real estate investments across multiple states, have a lot of money available for both flip loans and DSCRs.

A problem with banks is they’re limited to one state or region. A problem with hard money and OPM is that funds can run dry. Hedge funds solve those problems.

Keep hedge funds in your portfolio to have a lender who can handle every deal. They can grow with you as you move across state lines and take your investment career to the next level.

Gap Funding with Real OPM

OPM stands for other people’s money. It comes from a real person you know (who’s sitting on a lot of cash!). They want to put their money somewhere secure that’ll give them a better rate than a bank… So they loan it to you.

You can give your OPM lender a rate of 5-6% back. For you, this beats the 9-12% rates of hedge funds or hard money. For your lender, this beats the 1-2% rate they’d get from a CD or savings account.

OPM can be used to fill in the gaps of any project. It could cover down payment or construction costs, or potentially fund entire properties.

With reliable OPM, you have access to the speed of hard money, the low cost of a bank loan, and the flexibility of a hedge fund.

The main drawback of OPM is simple: it can run out.

The Right Real Estate Loans to Leverage Deals AND the Right Lender

No one form of leverage is going to be right for every single deal. Understand this: You need a mix of all four types of loans to be truly successful as a real estate investor.

And not only do you need the right loan, but you also need the right lender. Getting to know the lenders in your area is vital.

Find Lenders Whose Real Estate Loans Leverage Deals

Not all banks are willing to work with real estate investors. Banks tend to have a “specialty,” whether car loans, credit cards, or even HELOCs. Many banks don’t want to do deals with real estate investors.

It can be the same with hard money and hedge funds – they’re all looking for a particular client. One of your deals may not fit the criteria for those lenders, but another one will.

There is no one-size-fits-all. Reach out and find the lenders that fit your needs.

Find lenders who focus on real estate investing loans regularly – not lenders who will help investors every once in a while. They’re the lenders who will want your business, and will do everything they can to keep you. For a lender who specializes in real estate investing, a successful investment for you is successful for them, too.

If you have any questions about:

  • The different forms of leverage
  • How to find a good lender
  • Which loan is right for your deal

Send us an email at Info@TheCashFlowCompany.com! Or visit our YouTube channel for more info on cash flow in real estate.

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How to Maximize Your Leverage in Real Estate Investing

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Text: "How to Maximize Leverage"

Leverage is a powerful investing tool. How does it look to maximize your leverage?

A real estate investor’s goal is to maximize leverage – get the best, cheapest, easiest leverage available.

This means going an extra step:

  • Having great credit.
  • Having great income.
  • Coming to the lender prepared.
  • Having investment experience.

In a previous blog post, we broke down the difference using leverage makes for your income and net worth.

Now, let’s say you’ve done everything right, and you’ve earned yourself better leverage from your lender.

What happens when the same scenario is taken to the next level with top-tier leverage?

80% Leverage

To start, we’ll say you meet the bank’s criteria, and they agree to lend you 80% (or $80,000) on each $100,000 house you purchase.

Income with Maximized Leverage

Your down payment per property is now only $20,000, so you can afford 5 properties. But since you borrowed more money, the mortgage payment is higher, and the net rent goes down to $750/month.

Five properties with an income of $700 per month is $3,500 per month. This works out to be $42,000 per year. Annually, that’s $6,000 more than using a 75% loan, and $27,600 more than using no leverage at all.

Equity with Maximized Leverage

Lastly, let’s look at the wealth side with maxed-out leverage.

Thirty years adds $750,000 to the value of the 5 homes. All that money is added to your net worth.

As a result of the $750k of equity plus the $500k of the original purchase of the homes, your net worth increases by $1,250,000.

Once your mortgage is paid off and you own all 5 properties free and clear, you earn the full amount of rent per month. This is $1,200 × 5 properties, or $6,000 per month!

Using good leverage has the potential to make you literal millions of dollars over buying investment properties in cash.

Read the full article here.

Watch the video here:

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How to 5X Your Real Estate Investments

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Text: "How to 5X Your Real Estate Investments"

Leverage can 5x your real estate investments. Let’s look at how.

Should a real estate investor ever avoid leverage? Should they always use cash when possible?

Short answer: nope.

Using leverage can help you 5x your real estate investments. Let’s take a simple example to show how it works.

Cash vs Leverage

First off, we’re going to use simple numbers in this example.

Of course, home costs and rent costs will change in different markets and different areas. But we’ll run with these numbers – even if they aren’t 100% accurate, they’ll paint a good picture of the math that backs up leverage.

Let’s say you have $100,000 at your disposal that you want to invest in real estate.

Income Real Estate Investing with NO Leverage

To begin with, you could take all the money and buy one property valued at $100,000 outright. You’d invest the full $100k, own the house free and clear, and receive $1,200 of net rent income per month.

This adds up to $14,400 per year you’d earn from a house you fully own.

Income Real Estate Investing WITH Leverage

Now let’s see how it plays out when you involve a lender rather than buying outright.

You could offer to put down $25,000, and the lender might agree to loan you the other $75,000. That $75,000 covered by the lender would be your leverage.

And now, instead of pouring all your money into one property… you only have to put in $25,000.

Take your $100,000 and divide it by 25,000. That’s 4 properties you could buy with leverage. For the same out-of-pocket amount as buying 1 property outright.

However, because you’re now paying a mortgage on these rental properties, your monthly net rent goes down.

Your income is now $750 per property. Multiplied by 4 properties. So this brings in $3,000 per month, or $36,000 per year.

You have the potential to make an additional $21,600 per year – just from using leverage.

No matter what amount you start with (in this case, $100,000), using leverage brings in more income.

How Does Leverage Change Your Net Worth?

Monthly rent income isn’t the only way a rental property makes you money. It will also increase in value.

When a home appreciates, it increases your total net worth. The average yearly appreciation rate for real estate across the country is 5%.

It’s clear that leverage impacts income, but what about wealth?

Let’s throw this 5% number into our equation and see what happens with leverage.

Net Worth No Leverage

If a property was purchased for $100,000, that one home would increase in value by an average of $5,000 per year.

So, the one home you bought outright would give you $150,000 in equity after 30 years.

You bought it for $100,000. After 30 years, you’re adding $150,000. So that’s a net value of $250,000.

Net Worth with Leverage

Next, let’s see the equity of the 4 properties purchased with leverage.

Multiply your 4 properties by the $5,000 in value they each increase every year. Your portfolio will appreciate $20,000 per year.

Over a 30-year span, your 4 properties would add $600,000 to your net worth. Add the original values of the homes (4 × $100,000), and your net worth increases by $1,000,000.

A million using leverage definitely beats the $250k you got from buying 1 home outright.

Read the full article here.

Watch the video here:

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The Most Important Step in Real Estate Investing: Leverage

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How to turn $100,000 into $1.25 million by real estate investing with leverage.

A real estate investor’s most valuable tool is leverage.

Without it, you can’t buy, can’t hold, and can’t profit from your properties.

To prove our point that leverage is the most important step in real estate investing, let’s ask the question:

If you had the free capital to spend, would you make more money by buying a home outright or by using debt (leverage)?

Let’s break down a simple transaction to answer this question.

How Far Can You Get with $100,000?

First off, we’re going to use simple numbers in this example.

Of course, home costs and rent costs will change in different markets and different areas. But we’ll run with these numbers – even if they aren’t 100% accurate, they’ll paint a good picture of the math that backs up leverage.

Let’s say you have $100,000 at your disposal that you want to invest in real estate.

Income Real Estate Investing with NO Leverage

To begin with, you could take all the money and buy one property valued at $100,000 outright. You’d invest the full $100k, own the house free and clear, and receive $1,200 of net rent income per month.

This adds up to $14,400 per year you’d earn from a house you fully own.

Income Real Estate Investing WITH Leverage

Now let’s see how it plays out when you involve a lender rather than buying outright.

You could offer to put down $25,000, and the lender might agree to loan you the other $75,000. That $75,000 covered by the lender would be your leverage.

And now, instead of pouring all your money into one property… you only have to put in $25,000.

Take your $100,000 and divide it by 25,000. That’s 4 properties you could buy with leverage. For the same out-of-pocket amount as buying 1 property outright.

However, because you’re now paying a mortgage on these rental properties, your monthly net rent goes down.

Your income is now $750 per property. Multiplied by 4 properties. So this brings in $3,000 per month, or $36,000 per year.

You have the potential to make an additional $21,600 per year – just from using leverage.

No matter what amount you start with (in this case, $100,000), using leverage brings in more income.

How Does Leverage Change Your Net Worth?

Monthly rent income isn’t the only way a rental property makes you money. It will also increase in value.

When a home appreciates, it increases your total net worth. The average yearly appreciation rate for real estate across the country is 5%.

It’s clear that leverage impacts income, but what about wealth?

Let’s throw this 5% number into our equation and see what happens with leverage.

Net Worth No Leverage

If a property was purchased for $100,000, that one home would increase in value by an average of $5,000 per year.

So, the one home you bought outright would give you $150,000 in equity after 30 years.

You bought it for $100,000. After 30 years, you’re adding $150,000. So that’s a net value of $250,000.

Net Worth with Leverage

Next, let’s see the equity of the 4 properties purchased with leverage.

Multiply your 4 properties by the $5,000 in value they each increase every year. Your portfolio will appreciate $20,000 per year.

Over a 30-year span, your 4 properties would add $600,000 to your net worth. Add the original values of the homes (4 × $100,000), and your net worth increases by $1,000,000.

A million using leverage definitely beats the $250k you got from buying 1 home outright.

What If You Maximize Your Real Estate Investing Leverage?

A real estate investor’s goal is to maximize leverage – get the best, cheapest, easiest leverage available.

This means going an extra step:

  • Having great credit.
  • Having great income.
  • Coming to the lender prepared.
  • Having investment experience.

Let’s say you’ve done everything right, and you’ve earned yourself better leverage from your lender.

What happens when the same scenario is taken to the next level with top-tier leverage?

80% Leverage

You meet the bank’s criteria, and they agree to lend you 80% (or $80,000) on each $100,000 house you purchase.

Income with Maximized Leverage

Your down payment per property is now only $20,000, so you can afford 5 properties. But since you borrowed more money, the mortgage payment is higher, and the net rent goes down to $750/month.

Five properties with an income of $700 per month is $3,500 per month. This works out to be $42,000 per year. Annually, that’s $6,000 more than using a 75% loan, and $27,600 more than using no leverage at all.

Equity with Maximized Leverage

Lastly, let’s look at the wealth side with maxed-out leverage.

Thirty years adds $750,000 to the value of the 5 homes. All that money is added to your net worth.

As a result of the $750k of equity plus the $500k of the original purchase of the homes, your net worth is increased $1,250,000.

Once your mortgage is paid off and you own all 5 properties free and clear, you earn the full amount of rent per month. This is $1,200 × 5 properties, or $6,000 per month!

Using good leverage has the potential to make you literal millions of dollars over buying investment properties in cash.

How to Start Maximizing Your Leverage as a Real Estate Investor

Our goal is to help you understand and use the power of leverage. We scour the markets looking for debt with the best terms – the lowest down payments, the lowest credit requirements, and the lowest rates.

If you’re looking to maximize your leverage, email us at Info@TheCashFlowCompany.com. We’ll help you with questions and deals, and get you headed in the right direction.

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