In our last episode of As the Leveraged World Turns, (so sorry ’bout that one, really) we talked of what leverage really is primarily — and what it’s (mainly) NOT, which is a low down payment. One of my favorite readers asked if I could give an example, using real numbers.
Gonna make this short and simple so I don’t fall into the War & Peace trap. 
Read the rest of this entry »
Wanted to give ya some food for thought going into the weekend. Leverage has been center stage in real estate and Wall Street the last few years. It’s meaning as it relates to investing of any kind was run through the meat grinder decades ago. In real estate investing, it now has the universal implication of the size of your down payment — a bastardized definition at best — a recipe for disaster at worst. The smaller the down, the more leverage applied. At best that ‘undersatnding’ is secondary to its primary essence.
The reason I bring this up is due to the flippancy with which the subject is tossed around in the media, at conferences I attend, and even by well intentioned real estate investors themselves. Viewing leverage as merely the ratio of down payment over debt is about as wrong as one might construe the concept. I’m reminded of a conversation on one of my all time favorite shows, M*A*S*H. Read the rest of this entry »
The human condition is one of constantly merging what we want with what we perceive — with what is in fact, reality. It sounds vanilla simple as ya read it, but we all know what a dangerous outlook human perception can be if it’s not aligned with the world’s merciless empirical truth.
I remember with a wincing smile the day I arrived at a friendly broker’s office to drop of an offer. It was way back in another life. I hadn’t seen this husband/wife team in over a year, so was lookin’ forward to the visit. When I arrived the wife happily remarked, “We were wondering who the chubby blond guy was.”
Ouch! Not exactly how I perceived myself.
That was the inauspicious beginning of my marathon career, another post altogether. Suffice to say, the next year or so saw a loss of 40-something pounds and over 7 inches on the waistline. Ultimately it was the consequence of merging reality with perception. The whole ‘perception is reality’ concept is true enough, but the so-called reality is often nothin’ but a mirage, as was my laughable ‘lean and mean’ self image. Read the rest of this entry »
Today I’m addressing the investor interested in growing their net worth through real estate. I’m not talking about those who are investing solely for the benefit of monthly cash flow. Furthermore, there is much room for folks to disagree with what they think the #1 most abused principle might be. I think it’s this one. I’m sure it’s a frequent hot topic around the diner table in your home, right?.
Regardless of the passage of time, one of the constants remaining firmly implanted in many investors’ mindset is the idea that an investment property without abundant cash flow is to be avoided at all costs. The problem inherent with that school of thought is rooted in a few related principles, plus the difference between today’s realities and Grandpa’s memory of the way ‘it used to be’ — which in reality means to Grandpa, ‘the way it should be’.
The Principle in play: To the extent you go for growth you retard cash flow — and vice versa. Read the rest of this entry »
Think about the words you use when it comes to investing, or your retirement, or real estate in general. So many people use words which sometimes fail to impart exactly what they’re trying to say. Ever been in a conversation that seems to go around and around, getting nowhere in record time? That can happen for lots of reasons. My experience says more likely than not, the words are not doin’ the job each speaker has employed them to do.
Words mean things. To the real estate investor the word leverage connotes a specific concept. Most would say it means — to control real estate with a relatively small amount of capital.
First of all, what’s small? Then, what’s relatively small? Then there’s the question being begged — is your meaning for leverage the same as the other guy’s?
With apologies, most investors would be incorrect. Sure, using a small down payment to control real estate is one form of leverage, or rather, one meaning. But that definition is simplistic at best, and potentially ruinous at worst. Read the rest of this entry »
A Makhaira (ma – ki – rah) is the name used, in Koine Greek, (Created, in part by Alexander the Great as the common language for his huge military.) a dead language, for sword. It was often used, (to the confusion of many) when talking about the sword used by Roman soldiers. They actually used, for 2-3 centuries, a sword referred to as gladius.
Keep the faith — slowly but surely, this will dovetail into real estate investing for retirement.
The gladius was different. It’s design aided the Roman legionary’s battlefield tactics. First, it was much shorter than what we’ve come to know as a sword. The blade was usually only 19-20″ long. Second, it was double edged, able to cut savagely both ways — a huge improvement. Third, its design went away from the oft used leaf shape, to a simple, straight blade.
These changes were a result of Rome’s enemies modifying their defenses. I won’t bore you with the details here, but here’s a description of what a legionary was now able to do in battle. Read the rest of this entry »
For about a year, Randy has been ‘lurking in the shadows’ (his words), reading these pages. This morning he asked an excellent question, which allowed me to address one of the most misused, misunderstood concepts in investing — leverage.
Here’s Randy’s question:
Now when deciding to invest now or at some point in the future the cost of that leverage has to be taken into the total purchase price.
I noticed that you had been advocating making purchases given the current benign interest rate environment. Is there some rule of thumb that will dictate current purchase (or total ownership prices) in a higher interest rate environment … so in higher interest rate environments, won’t prices come down to account for higher financing costs? Is it not this simple (it never is)?
Randy — Great question — and no, it’s never that simple. Read the rest of this entry »
What’s not good about land? Bottom line, without it we’re either sportin’ gills or flappin’ wings. Most investors simply don’t do well with land, as the use of leverage with land automatically means moderate to massive negative cash flow from Day 1 99% of the time. Sound alluring?
Is land a vehicle equipped to provide a smooth ride for real estate investors on their way to Retirement Land? Not in my humble opinion, and for several concrete reasons.
1. When capital growth is needed most, the first dollars of any real appreciation are soaked up by the cost of simply holding the land — and that’s free and clear land.
2. To the extent you took on debt in the acquisition of the land, your negative cash flow is now approaching scary territory. And don’t say, “I put 50% down’ ‘cuz that means you’re now servicing debt at a rate of at least 5-8% a year. To have your capital grow one itty bitty drop, the appreciation must exceed all your holding costs by the same little drop. Not freakin’ likely, mate. Read the rest of this entry »