As you go through the course, you'll think, "All of this sounds pretty awesome so far! Buy property, increase NOI or roll-up, create value — it's a great system. Let's go figure out our operational niche and get rich!"
Next I'll teach you about the gasoline we can pour on the fire to multiply our returns and crank up our cash flow and put our appreciation on steroids. I'm talking about a little something called leverage.
It is debt. It is borrowed money from a bank. A loan. Mortgage. A note. It is called a few different things.
Leverage amplifies everything. Every real estate investor I know uses it and loves it and lives or dies by it. If you're new to this thing, prepare to have your mind blown by its power.
First of all, this is a double-edged sword. I'm about to tell you how it works FOR investors. It can just as quickly cripple projects and bankrupt investors. We'll talk more about the downside in the RISKS section.
Let's dive in and use one of my previous deals to paint the picture.
We did a deal in Newfield for $2.175MM. We bought it at an "in-place" cap rate of 7.31% and a "pro forma" cap rate of 13.46%. We only needed to put up $543k of our cash to buy it. A local bank that does commercial lending financed the rest.
Huge question that informs everything else → how much of the purchase price will the bank finance?
It depends on the asset class, the bank, and the strength of the borrowers/operators. If you are good at what you do, have a lot of cash, and have experience cranking out the numbers you are projecting, you can get debt at a reasonable price.
In the starter class I go much much deeper on the ways you can use leverage to scale up your portfolio... as long as you pay attention to the ADJUSTED RISK of the project. You'll everything in my Real Estate courses!
