Since the beginning of time the wise use of leverage has made people very rich throughout the world. Leverage has had two major components throughout my real estate career:
- Leverage of people
- Leverage of finance for real estate purchases
The use of leverage of people is really basic, this is how every business is operated. In real estate we hire realtors, bird dogs, contractors, property managers, handy-men, bookkeepers, marketers, social media promotors…the list continues with all these things we can’t or won’t do ourselves. The main idea here is to do what you do best and hire the rest of the people to help bring you closer to your goals.
It’s the unwise use of financial leverage that gets many well-intended investors in trouble and I’d like to take you a little deeper on why liquidity is so important with real estate.
People have short-term memory issues unless something really bad happened. In 2006, the real estate bubble in Florida was in full force, where I reside. At that time, the market was ignited by low interest rates and easy credit which was fueled by investors throughout the country especially buyers from California. At that time I was wholesaling properties primarily in Florida with an emphasis on the Tampa and Sarasota Bay areas. In an average month we would wholesale 8-22 houses, this would occur every single month. I remember so well that if we overpaid for a house in the morning, we would wait a day or two to sell it because prices were going up so fast. The buying frenzy was on and like today’s market, our biggest challenge was obtaining quality inventory.
The point here is that most of these buyers had no equity at the time of purchase which translate to no liquidity. Buyers from California would buy anything in Florida they could if they could get financing with zero concern for liquidity, and no thought of shortfalls or depressed values. Hey, I also was caught up in holding highly leveraged properties and it cost me dearly.
You know the rest of the story as this was a disaster for investors and most of them lost the properties at foreclosure.
Single Family Houses are the Most Liquid of All Real Estate Investments
The case for single family houses (SFH) is they are so easy for me to make because I’ve owned thousands, including apartments and condominiums.
I write this from my personal ownership experience with all these types of properties.
Let’s pretend: Let’s say you can buy a 10 unit apartment building for $1,000,000 or 10 houses at $100,000 each all cash without financing. What would be better for you?
Some people might say the apartment building would be better because all your tenants are centralized and under one roof. I’ve had both and I would have to say the SFH would be best for the following reason: Liquidity! If I ever needed say $150,000 I could raise the funds easily in a number of ways:
- I could sell a house or two.
- I could borrow on a house or two conventionally or with private funding.
- I could sell a partial interest in a few houses to another investor.
- I could sell an option to purchase to tenants.
You can’t do that with an apartment building or an office building!
It costs a lot more money to borrow on any type of commercial property and it’s more challenging to do so.
Another reason I would chose single family homes is: Different Locations.
More locations allow you to diversify your portfolio. The best way to explain this would be the 25,000 square foot office building I bought in New York for $975,000 in 1986. The area decreased in value and so did my investment, I sold it 3 years later for $840,000. Why, I was stuck with all my units in one location and that property lost $135,000 of value.
If you attempt to sell an apartment or office building, you will sell to sophisticated investors that buy property based on a cap rate. Thus, your sale price is determined by the cap rate. With SFHs, you can sell to an end user/homeowner and these types of buyers will pay more if you have a well-located house because end-users/homeowners buy for emotional reasons!
I paid full price for my last home in NY and my current home in Florida. Why? Because it fit my family’s needs and when it comes to buying a home for your family we buy for many reasons and most of them are emotional.
The wise use of leverage is appropriate whereby there is equity in the property, thus liquidity. This means you either by the house significantly under value or put more money down. But before you do that, it’s important to remember that investors cannot be clumped together. We are in different seasons of life based on age, children, marital status and financial resources. .
When you are young you have more recovery time if you screw up, and we all screw something up at some point in life. As we get older safety and preservation of wealth become more important than ROI. Remember, return of investment is more important than return on investment.
Liquidity is important as the “winds of change” are constantly blowing and we all need a backup plan when shit hits the fan.
That being said, if you’d be interested in learning more about the safest real estate investment ever offering immediate and above average equity (which is perfect for retirement accounts), call me direct at (813) 435.1551 ext. 1001 or email me at [email protected].