How does leverage function?

2 Replies

"Leverage" just means financing.  As opposed to paying cash.

Sometimes it is possible to buy a property, fix it up, and then refinance using a new, higher appraisal and get enough cash to use for a down payment on the next property. Back during the bubble when lenders would give you 100% (or more) financing and loans were easy to get, this was a LOT easier. Now you have to do significant improvements, hold it long enough to meet the lender's seasoning requirements and still get enough from the refi to generate a new down payment while still saying under the lender's LTV limit on the refi.

For what it's worth, one of my mentors does it this way:

1. Buys a property under market having subtracted his profit, repair estimates and selling costs when formulation his purchase offer.

2. Rehab, gets a new appraisal, then refinances BEFORE selling to pull out all his money into the deal (and some profit, not all of it), and uses that money to get into the next deal.

As you might imagine, he's very selective of the properties he offers on and is a skilled negotiator.