Power of Leverage - Posted by JeffB (MI)

Posted by JD (IL) on March 13, 2006 at 17:53:56:

I’ve been going like this for quite some time. As long as you have good coverage by the other loans, you can grow faster with leverage. Just keep it at a comfortable level for yourself.

Power of Leverage - Posted by JeffB (MI)

Posted by JeffB (MI) on March 13, 2006 at 08:30:24:

Bought a beautiful 14x70 2/2 with all appliances, C/A, and deck for $3,856 last week. Spent another $150 on little odds and ends and utilities. Sold yesterday for $11,400 with $1100 down, $271.24/mo for 48 months at 12%. The check I wrote from purchasing the home has not even cleared yet, and I’ve already got the cash down payment in my hands. I spent about one hour of my time inside the home, and only had to show it twice.

I paid a little more than I would have liked to for this home, but it was in such excellent condition I was able to justify the higher price.

I had been wanting to buy this home for quite some time, but did not have the funds. Finally I decided to borrow some money from a private investor, $10k for 2 years, interest only at 12%, which enabled me to buy this home. This one deal nearly pays the entire loan back to the investor, and leaves me with the other $6k to do more deals using free money. I made the decision to borrow the money largely because of another discussion thread a few weeks ago about leveraging Lonnie deals. Thanks to all who made some good points and convinced me that this was something worth considering.

Re: Power of Leverage - Posted by Ryan (NC)

Posted by Ryan (NC) on March 13, 2006 at 09:48:38:

Sweet deal Jeff! So what’s your yield with none of your personal money invested? Just be careful of the balloon that will be due in two years and make sure it’s paid down to a point that you can pay it if needed. You?ve taken a big step, now all ya gota do is invest the other 6k then rinse and repeat :wink:

Best wishes,
Ryan Needler

Best wishes,
Ryan Needler

Re: Power of Leverage - Posted by Bill in GA

Posted by Bill in GA on March 13, 2006 at 17:15:22:

Yield is infinite with no money invested. I got really excited for Jeff when I first saw the numbers. But then I ran them in my spreadsheet…

Infinite yield is great, any day of the week. But your cashflow is -199.50 monthly because of your investor. I calculate that you’re paying your investor $470.73 monthly, unless as Ryan believes there is a balloon? I was assuming that based on your statement, there was no balloon.

If you feel confident that you’re going to get at least one more (admittedly very sweet) deal just like this one quickly, then you’re doing a little better.

1 * 271.24 - 470.73 = -199.50 cashflow for the first 24
2 * 271.24 - 470.73 = 71.74 cashflow for the first 24

If you’re comfortable with that risk, then all is well.

Good hunting,

  • Bill (in GA)

Re: Power of Leverage - Posted by Ryan (NC)

Posted by Ryan (NC) on March 13, 2006 at 21:51:40:

In my opinion the safety in this type of loan is that his outlay is the interest charge if everything goes wrong at once… The down side is that to many bad months or failure to pay down the loan fast enough leaves you at the mercy of the lender when the call hits and they make the rules at that point.

Now with that said? With good management and sensible investing Jeff should be able to buy 4-5 units with 10k and the down payments which means he should be cash flowing at roughly $400-$500 a month with his debt fully amortization in 24 months and the risk is spread across 4-5 folks. If he so chooses he can repay the total debt in approximately 12 months if he simply pays down debt and doesn?t reinvest or live on any of the money and he still has the remainder of the notes and any take backs on these units. I would still personally try for longer repayment terms to keep the cash flow high and the “minimum” payment low for safety since our buyers and tenants don’t always tend to be the best paying but for those of us that are limited on funds or have simply ran outa cash it doesn’t take very many $500 a month pay raises using OPM to send a boss packing.

I don?t personally like balloons, but this still beats the heck outa any compensation or retirement program I?ve ever been offered working for someone else.

Best Wishes,
Ryan Needler

Re: Power of Leverage - Posted by JeffB (MI)

Posted by JeffB (MI) on March 13, 2006 at 17:34:02:

Ryan is correct, it’s a balloon in two years. $100 per month, interest only payments. That timetable was suggested by me, not the investor. I think they’d rather me never pay them off. One of the nice things I got out of my JOB was a whole list of people lined up waiting to loan me money at 10-12%. These are busy management level white-collar folks who have large amounts of cash sitting in checking accounts at zero percent.

In this case, my yield on the money invested is about 116% (numbers changed slightly at closing but overall the deal is about the same). So borrowing at 12% and lending at 116% is a no-brainer in my book. Would I want to structure my entire business this way? I don’t know. I haven’t really thought about my comfort level using this much leverage, on a larger scale, in my business yet. This was deal number eight for me so the cashflow I have from other deals can carry this loan should everything go south.

I really feel like I can get 80% on my money quite easily. Higher yields usually require more work on the homes in my experience. I guess the question is, if one can average 80%, what would be the “risk-adjusted rate of return” that this equates to. As long as it’s over 12%, you’re making money right!

Re: Power of Leverage - Posted by Bill in GA

Posted by Bill in GA on March 13, 2006 at 21:14:55:

True enough. Way to go!

  • Bill

Re: Power of Leverage - Posted by Marty (MO)

Posted by Marty (MO) on March 13, 2006 at 19:07:06:

“risk-adjusted rate of return” is a great term. We’re much more conservative now, but I think it’s because we can afford to be.
Leverage is one of the more fascinating aspects of the business. I still find myself working the numbers… look at what a Roth would do if you conservatively ran the numbers at 36%! Doubling your money every other year… Anyone on this board can do that without breaking a sweat. No taxes… I haven’t done much with my Roth, but this is my next big project!
Good post, Jeff-