Is Cash Always King? Not in Real Estate!
It’s a question we hear a lot.
Is it better to fund that fix and flip deal with cold hard cash or use leverage to make the purchase?
Well, here at Navigator Private Capital we are a bit biased but it’s pretty clear to us that leveraging the property is the way to go. Why, you may ask?
Let’s break it down…
Ponying Up The Cash
Suppose you find a distressed property with tons of fix and flip potential and a list price of $100K. And let’s also assume that you have $140K in the bank - liquid and ripe for investment. So one option is to purchase the property outright and use the $40K for repairs. Let’s also assume that you can turn around and sell the property for $200K. That’s a $60K profit or 40% return on your original investment of $140K. Not too shabby.
- Purchase One Property In Cash – $100K
- Fund Repairs In Cash – $40K
- Sell Property – $200K
- Profit – $60K
- Return – 40%
Forgoing Opportunity
But, think about this. By pouring all of your cash into one single property, you are effectively shutting the door on all other opportunities that may come knocking. That means missing out on potentially profitable deals that may require a bit of cash upfront. Somehow this doesn’t seem to be the best use of limited resources, does it?
Leveraging Your Profits
What if, instead, you procure some financing and leverage your investment? In the prior example, remember that you have $140K in the bank waiting to be deployed. Consulting a good private lender that specializes in fix and flip financing, you figure out that, for only about $20K upfront, you could make seven investments similar to the scenario described above.
- Purchase Seven Properties at 85% LTC – $140K down ($20K each property)
- Finance Repairs – $280K ($40K each property)
- Sell Properties – $1.4M ($200K each property)
- Profit – $420K
- Return – 300%
By now you can see why leverage is the secret weapon you need to dominate the market.
- Amplified Returns: Rental income and potential appreciation are magnified because they work on the entire property value, not just your down payment. It revs up your investment engine!
- Build a Portfolio Powerhouse: Leverage lets you acquire multiple properties, accelerating your path to becoming a real estate mogul.
- Tax Advantages: Mortgage interest and depreciation can be tax-deductible, further sweetening the deal.
Of Course, There's a Flip Side (But It's Manageable!)
Leverage isn't risk-free, but with the right strategy, you can navigate the bumps:
- Market Swings: Rising interest rates or a market dip can be challenging, but careful planning and property selection can mitigate the risk.
- Debt Obligations: Monthly mortgage payments are a factor, but with a well-chosen property, the rental income will comfortably cover them.
The Navigator's Call to Action: Leverage Your Way to Success
Don't let fear of debt hold you back. Leverage, used smartly, is the key to building a substantial real estate portfolio. Here at Navigator Private Capital, we're experts in helping investors leverage their way to success. We'll guide you in choosing the right properties, securing the best financing options, and ensuring your investments are firing on all cylinders.
Contact your loan officer today or reach out at 888.444.3160 or info@gonavcap.com to be put in touch. Get the ball rolling by requesting a free, no-obligation quote on your property below.