Epiphany or Fooling Myself

3 Replies

Started real estate investing last year and focused on one or two unit properties.  My goal this year is to expand and to do that I will need to leverage exiting properties.  I got a mortgage quote yesterday for two  properties I own outright and now want to leverage and use the money to buy more units under a roof.

Initially when I looked at the numbers I was disappointed as it looked like the lender was taking the bulk of my profits. But when I did the math I am making the same 9% and 13% ROI...just smaller capital since I got back money to reinvest. Now my thinking is, "I will do better on the ROI with this new money"...at least that is the plan. I actually see some properties that I could do very well with, which seems to be a definite win for me.

Am I seeing this clearly?  

Stephen,

I am ready to expand and will need leverage to do that. The offer from the lender seemed to be killing my profits as it will take 5.5% in interest + ~5.5% principal payback + escrow account. On face value to me it looked like a terrible deal. However when I ran the numbers and compared non leveraged ROI vs leveraged ROI they were actually almost identical.

So it seems like its actual a good deal, especially if I used the cash out funds to invest in a better ROI property.

example. pre mortgage Net Income was $1000 on $100,000 capital for 10% ROI. Post mortgage Net Income is $500 on $50,000 capital for same 10% ROI. So although I am getting less total dollars per month the ROI is the same.

Just try to do better ROI on cashed out dollars right?

Just like with your original investment you would need to invest your additional capital in a cashflowin project to make it worthwhile.  The more OPM you use the better your returns will look on paper but if you overleverage and run into an issue you better have a backup plan.

Finding that middle ground where you leverage well and still have backup plans in place for costly issues is what we all look for on a daily basis in any investment.

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