The Power of Leveraging - Building your Nest Egg one Deal at a Time

Real Estate PortfolioBuying1031 ExchangeLeveragePortfolio managementcapital gainsproperty managementreal estate investment strategyincome propertiesequity growth
Kristopher Franks
Kristopher Franks
Delivering the Bottom Line
Posted on : 10/06/2021

I know what you're thinking. Not another person telling me I can become a real estate millionaire if I just buy their book or go to their seminar. Not even close! I wouldn't waste your time or mine telling anyone that becoming a real estate millionaire is easy or happens overnight. I would like, however, to share my own experience about how you can become very wealthy and financially independent with a logical, disciplined approach to real estate investment. There's just a couple of key factors the are a MUST in getting to your destination:

- Choose the Right Market

- Choose the Right Professionals to Help You

- Obtain Advantageous Leveraging

- Choose the Right Property for the Right Price in the Right Location

I was lucky enough to grow up in one of the 'right' markets (Fort Worth), and my mother was a property manager. If you are unsure of where to invest, check out this map :

This map does an outstanding job in guiding you towards the best places in the DFW area for income producing residential investment properties.

From early on, I saw 'other' people getting wealthy from my mom's hard work. I wondered how they did it. Then, years later, it finally hit me. They didn't do it. My mom did most of the work. At this point, I realized the incredible and irreplaceable value of choosing the best property manager. Her tireless work and savvy decision making with regard to maintenance & leasing was key to the success of the properties. Why didn't my own family invest in real estate so that one day they'd be hiring a property manager and living off of their income? Little did I know that it was just a matter of getting that first chunk of change together and then qualifying for financing. At the ripe age of 26, I said Mom, why don't YOU invest in real estate? Let's buy the first house together. So, we did. We paid 82,500 for this house around 14 years ago and put in about 17K to fix it up. It's been leased non-stop for the last 14 years. We put a 15 year mortgage on the house at the time of purchase. Today, it's worth about 180K and is nearly paid for. It has produced thousands in rental income over the years. So, what did it take to make this happen? It took 20% of the sales price - $16,500 plus some closing costs ($5,000) plus 17K to fix it up for a grand total of $38,500.00. That means we grew our $38,500 to $180,000 in approximately 15 years while cashing in on over 30K of free cash flow over that same period. Now, that is a return that you CAN realize in real estate. Those who use the power of leveraging will normally yield more in the long run than cash investors. However, leveraging doesn't make sense for everyone. If you are already sitting on several million in capital and need to generate immediate income from that capital, cash purchases could be right for you depending on your goals and circumstances.

Back to the power of leveraging...

Do we get rich quick? No. But, let's imagine that you invest 38K ever year or every other year. Lenders will give up to 10 government backed 30 year loans to investors in most cases. This is easier if you are established in your profession and can document at least two years of steady income from the same source. It's easy to see how you can get your million in equity.

Once you build this initial single family investment portfolio and achieve a significant equity position, you are now just getting started... Let's say you end up acquiring 5 homes total over a period of 5 years. Let's say ten years into your portfolio, you decide you're ready to step things up a notch to gear up for retirement in a few more years. Looking at the future value of the 5 investment properties all with 30 year mortgages, you realize that even though the value looks great, the income just isn't enough to get you where you need to be. You think about selling all of them and just sticking the equity in a CD and taking a break for a while while spending the money. That's like super indulgence and then ending up at square one again but now older! Don't do it. Why not do cash out REFIS (during period of low interest rates), KEEP the properties, use the Cash Out funds to pay cash for a few properties that DO give you the income you need. With the higher loan balances, maybe your initial portfolio of 5 just break even for now. BUT, what do you care? You have the income you need, and now you own 7 properties! Ten years later, look at the leveraged portfolio again. It may be time for another cash out REFI to buy more property, or perhaps you should sell them as a package and roll all of the equity into a commercial property using a tax free 1031 exchange. Now, you're ready for mailbox money!

The point is, you can achieve your dreams by starting small in real estate, and it can happen faster than you think. Maybe it sounds confusing - 1031 exchanges, cash out REFIS, blah, blah, blah... When you starting swimming around in those decisions, that's when you know that you've made it! You have options, and you can arrange your wealth as your circumstances change. Your wealth will serve YOU and your FAMILY.

Happy investing. As always, I'm here to help you.