USING LEVERAGE

USING LEVERAGE

“OK, OK, I got it up Henry”, said my father. “Now get the long crow-bar and stick it on top of the little rock and under the big rock as far as you can”. “Good, now pull down on the end of the crowbar as much as you can”. “See it moved about 6 inches”. “Let’s rest a minute”, he said. “We only have a few more feet to get the rock in position”.

This little event took place over 62 years ago as I helped my dad position a decorative rock to be used as a focal point in a new area of his garden in our backyard in Roselle, New Jersey. As far as I know, the rock is still there. We used leverage to move the rock. (Archimedes said he could move the earth if he had a fulcrum (the little rock) and a lever long enough.) However, this article is not about using leverage to move rocks.

Let’s say you can buy a four unit rental that rents for $750.00 per unit. How much should you pay? Below is a mini operating statement for the property.

Gross Projected Income  4 x $750 x 12             $ 36,000.00

Less vacancy  (about 10%)  5 x  $750               $   3,750.00

Gross Operating Income                                   $ 32,250.00

Less Operating expenses 45% of GOI             $  14,500.00

    NET OPERATING INCOME                          $ 17,750.00

Every investor wants two things: A return on his//her money, and a return of the money. Let’s build an Investment rate of return

                        Return on the Money                                    8%

                        Return of the Money  100/ 15yrs                  6.67%

                        Total rounded                                     15%

                        Less reduction for annual appreciation        2%

                        Net rate of Investment                                  13%

Years ago I was introduced to  IRV

I

____________________________________________

R                V

Income/ Rate = Value     Income/ value = Rate       Rate x value = Income

So $17,750 ( I ) divided by .13 ( R ) = a value (V) of  $136, 550.00 (rounded). Or in other words if you paid that much cash, you could expect a return of 13% plus appreciation annually of a conservative 2%. On the other hand say you went to the bank and they agreed to lend you 80% of $136,550 ($109,250) for 18 years at 9%  (put it in your calculator, but the payment will be $1,026.00 rounded.

NOI                                                                                         $17,750

Less total of payments                                                          $12,312

CASH FLOW FROM THE INVESTMENT                                 $  5,438

$5,438 divided by $27,300 (your investment)   =            $20.0% return

You see, the use of leverage increases your rate of return. In addition if the property appreciates 2% annually (an average of $2,842) for total annual return of $8,280, your return is over 30%!!

I don’t flip notes. I use local investors for part of the money and leverage my investment. SO SHOULD YOU.

Let’s say you find this note and it is for sale

N	I	PV	PMT	FV
152	8.75	41237.1	449.75	0

 The seller agrees to sell you the note for 85% of the present loan balance

N	I	PV	PMT	FV
152	12.01	35501.6	449.75	0

You find an investor who will partner with you on the note by lending you $33,000 for a return of  10.5%

N	I	PV	PMT	FV
152	10.5	33000	393.4	0

This means you must invest $2,051.56. You will collect the $449.75 and send the investor $393.40 leaving you $56.35

N	I	PV	PMT	FV
152	???	2051.56	56.35	0
	2.70

Gee you say, what’s so great about that. Wait a minute 2.70 is the monthly return x 12 equals 32.38%!!

So if you use leverage for moving rocks that’s great. But if you use it for investing in real estate or notes, YOUR INVESTMENT PORTFOLIO WILL REALLY ROCK!

PS Email me at hdvorken@wf.net and I will send you a free copy of the contract I use with local investors as an attachment to the return email.