INVESTORS; Have you heard the
phrase... "Buying Cash Flow"? I'm here to tell you that not all debt is bad debt. I can show
you a path utilizing "good debt" that leads to superior ROI.
Be smart about investing, forget about the "T.V. gurus" and benefit from real investment strategy. Acquire
cash flow free of ANY debt service! With diligent analysis and target selection, your debt services itself, you
reap the cash flow, the equity gain, tax benefit, etc. I can provide you the
Commercial Finance solution to "cookie-cutter" this formula for
repeated execution and maximized return!
My staff provides the expert investment
target analysis for you! Our Elite team at ERS can facilitate your Real Estate & Commercial Finance objectives in a full NO CHARGEInvestor Concierge Service available exclusively to our Clients.
BUSINESS OWNERS- Is
your premises Lease your largest monthly expense item? If you have staff, then
perhaps your Lease is running a close 2nd to payroll? If I told you I could not
only eliminate your Lease payment, but also totally eliminate ALL expense
related to your business location or occupancy... you would be interested, yes?
Well,
I share this model with Business Owners like you every day! How much money would
that save your Business monthly..... $3k, $5k, $15k perhaps?
What would you do with
that newly freed up capital? Leverage more personnel, perhaps expand your
marketing efforts.... increase market share, possibly double your production?
Depending upon whatdictionary you consult you will get five to seven definitions of the word
leverage. Each of the dictionaries
agrees there are two primary definitions.
1). the mechanical advantage gained
by being in a position to use a lever.
2). Investing with borrowed money as a
way to amplify potential gains.
You should take just a moment to reread both of
the definitions because when we talk about Financial Literacy, and the use of
leverage in the Game both definitions apply.Clearly the second definition is directly related to matters of finance,
but I offer that the first definition is as well, particularly when we talk
about leverage as the most successful strategy in the Game.Leverage provides an advantage, it is the
principle of acquiring more with less.A
high net worth Investor with moderate liquidity could purchase ten, $100k
single-family homes in cash; a $1M investment and nice addition perhaps to
their portfolio. Applying leverage the same Investor, with the same capital
investment $1M could acquire one hundred, $100k homes, assuming a 10:1
leveraging scenario.It is the advantage
of leverage, the ability to acquire more by applying the principle of leverage. No
different than how a system of pulleys and levers allow a man of average
strength to lift or manage a superior weight load, leveraged finance can afford
an Investor of average means the ability to acquire more substantial
assets.An Investor of average means
could for example apply a leveraged finance scenario to acquire those initial
ten, $100k single-family homes with a capital investment of merely $100k,
presuming the same 90 percent loan/value finance solution.In finance, the smart Players apply leverage
to maximize their investing capability and their liquidity.
Understand
that leverage is an investment strategy which can be used across the board for
stocks, bonds, commodities, currencies and multiple other investments. True Players are employing leverage
strategies in many facets of their wealth portfolio. Professional Traders, and
even Bond Market Investors can employ such strategies; for example, a Bond
Investor can capitalize on the differential between short-term interest rates
and long-term rates by borrowing at one, and investing at the other. There’s profit to be realized in the
offset. In the Game, some of the more
advanced leveraging strategies can be quite risky for the uninitiated as you must remember,
losses are also magnified.
No matter the use, leverage generally involves the use of funds not your
own. Generally speaking, the use of
others’ money has a cost, the cost of funds, or interest as we call it most
commonly. Cost of funds is one of the
factors in leveraging you must be cognizant of in order to mitigate the overall
risk. If you are going to use leverage
be certain to consider the cost of funds in your risk exposure analysis, not
doing so can be detrimental.
Earlier I gave an example of the most basic leverage application which
is the use of leverage to acquire real estate.
In my example an Investor with $1M in cash used leverage in just a 10:1
ratio to acquire one hundred, $100k houses.
If our Investor liquidated shortly thereafter and sold each house for
$110k he would have garnered a $1M profit, a 100% return on the original
capital investment. In the same example,
on the other side of the coin our Investor did not employ leverage and instead
paid cash for ten of the $100k houses.
If he were to liquidate his 10 houses in the non-leveraged scenario at
$110k/house, the profit would be merely $100k or a 10 percent return on the
original capital investment of $1M. As
any Investor will concur, a 10 percent return is good, but a 100 percent return
is stellar. This is an example of how
leverage can maximize the use of resources for greater capability and return.
It’s important to comprehend debt, understand
that not all debt is
bad, some debt is good. So how do you know the difference?
Good debt is debt that is paying you a return, or debt finance perhaps taken on
to acquire an asset which is providing you cash flow. An Investor who
purchases a $500k income producing asset using an 80 percent loan-to-value debt
finance scenario takes on $400k debt. Let us stipulate that the monthly
PITI, or Principle, Interest, Tax, and Insurance payment is $2,400 and the gross
income from rents is $3,400 per month. If we additionally factor 5 percent
annual appreciation and 3 percent annual rent increase, this becomes a really
good looking investment. In this scenario, there is a net cash flow of $12k
annually so you can attribute a cash-on-cash return on the original $100k
capital investment of 12 percent. Of course these are rough calculations,
and I have not included property operating expense, nor a vacancy allowance,
but you can see that the decision to take on the debt is paying dividends. This
is good debt.
Had leverage not been used in this scenario the cash-on-cash
return would have been a mere 2.4 percent, but the equity would be substantial
and the property would be debt free. However, an Investor with $500k in
cash could apply a leverage strategy and could have acquired multiple
properties in this scenario. In the realm of finance leverage comes in many
different forms and can be configured, and applied in many different
strategies. It is the most basic and most important component of the
Game. Your Financial Literacy must include an in depth comprehension of
leverage, particularly as it relates to debt finance. Your Financial
Literacy must also include a comprehensive grasp of the mathematics of
investing. Understanding the math of investing and finance will increase
your ability to make sound investment decisions and will mitigate your risk
when acquiring debt.
As your Advisor, I can certainly help you to employ a debt financed acquisition and portfolio strategy to achieve your Investment objectives. Let's talk about it: dameon.russell@ersfunding.com.
