Using Leverage to Boose Returns and Shift Risk

[Michael Evans]

We use leverage in our real estate deals. We've developed a deal management system that tells us how much leverage we can use and at what cost for the deal to be profitable. Our minimum leverage on flips is about 10% and 15% on buy and holds. We use 1st and 2nd mortgages to pay 70% of the purchase (1st mortgage) and the 30% down payment, rehab costs and closing costs (2nd mortgage). We then come in as the equity investor to cover out of pocket costs (inspection and appraisal) and holding costs (6 months worth).

Used correctly leverage will boost your returns while allowing you to shift risk to the 1st and 2nd mortgages.  It also allows you better money management since can you spread your cash over more deals and have eggs in more baskets. You can either put $100,000 cash into a single deal and make 10% or you can use leverage and put $100,000 into 10 deals at $10,000 each and earn 25% each deal. Which would you rather do?

Are other investors using leverage, and if so, to what extent?