One of many challenges faced by real estate investors is a question of when to use leverage to your advantage when purchasing a property. This is particularly crucial for first time investors, as their access to funds could be limited only allowing for a single large purchase or a number of small purchases that could dictate the viability of their portfolio going forward. To tackle this complex topic, we approach some of the best and brightest of ACI’s brokers and agents in order to consider this question:
When is it best to leverage money across multiple properties versus using all my cash on one deal? Should an investor purchase a smaller property and pay all cash, or use financing to purchase a larger, or multiple properties?
Chuck Hoffman, President & Broker of Record at ACI Says:
One of the most incredible aspects of investment real estate is the ability to use leverage-the ability to finance an investment using OPM(other people’s money). Most investors pay all cash for stocks and bonds which is different than investment real estate where the borrowed money is being repaid with rents from the tenants.
The extent to which leverage is used is generally related to the goals of the investor which typically is related to risk factors. Most people are more accepting of risk earlier in their life because there is a long time horizon to rectify any poor outcomes. As people age they usually become more risk averse as they look towards financial independence and or retirement.
When combining leverage with the benefits of cash flow, equity build-up through principal paydown, tax shelter and appreciation is it any wonder that investment real is ideal for everyone’s portfolio.
Keith Courtney, Principal at ACI Says:
It depends on the goal of the investor and the amount of risk the investor is willing to take. If an investors goal is to maximize the growth of their wealth and they are willing to accept slightly more risk, they will want to obtain the maximum about of debt, so they can purchase a larger building, or multiple buildings. If an investor is at or near retirement age, wants to minimize risk and depends on the income to live on or to improve their quality of life, they will want to use more of their own money and less debt to purchase a relatively smaller building.
Terry Taylor, Senior Vice President at ACI Says:
It is best to leverage your capital when markets are down and values are low, not when values are high and the risk of a market correction are high.
Arby Eivazian, Agent at ACI Says:
I would tailor that answer to the client’s particular financial situation and to the properties for which they are considering. For instance, if the property they are purchasing is primarily for appreciation, rather than cash flowing, I would recommend the client put enough cash towards the purchase to ensure the property pays for itself and that there is something left over to go towards reserves every month.
Generally speaking, I recommend clients use the least amount the lender will allow towards the purchase, in order to use leftover funds towards renovations or into another property because leveraging, coupled with the tax benefits, is one of the most powerful tools that real estate investments provide, among many others, which build wealth.