If you want to purchase multifamily properties, you need to get the resources needed to finance these acquisitions. There’s a lot of options you can consider, but for me, a good strategy is debt leverage. When you apply this method the right way, you can easily purchase an apartment complex and ensure that your cash flow remains healthy.
Debt leverage explained
Debt leverage, to put simply, is the process of borrowing funds that are intended to purchase additional assets. This promotes the growth of your real estate business. In fact, no other industry gets great deals from financial institutions, banks, lenders, Fannie Mae, and Freddie Mac other than real estate. In this industry, you can get loans between 65% and 80%. You only have to put down 35% to as low as 20% to control the investment.
Another reason why debt leverage works well with real estate investments is the added security. In fact, it’s more secure than other options such as stocks, bonds, precious metals and cryptocurrencies such as BitCoin. For one, lenders won’t usually provide loans for these options.
Using debt leverage can significantly increase the value of your investment. Let’s say you bought a property for $1 million and applied for a loan that’s 80% of the property’s total value. Now, let’s consider that you have an annual net operating income of about $100,000 and interest cost of $40,000. If the NOI remains the same by the end of the year, you can have a 30% return on your initial investment of $200,000.
As you can see, using debt leverage is a big factor in terms of enhancing the value of your property. Still, just like any other financing strategy, using your debt can get risky if you’re not careful.
Weighing the risks
If you ask me, leveraging your debt can help you improve your numbers and secure higher profitability on your part. If done right, it can bring in massive benefits. Of course, anything that produces a great deal of profit also entails a certain level of risk.
It’s important to understand that debt leverage is only effective if you’re generating a decent NOI every year. The greater the loan to value amount you applied for, the greater your risk profile will be. Take note that the success of your investment is always tied to NOI, and to make sure you get the right numbers in your NOI computation, you will have to develop a strategy for value plays.
For that, you can always consider remodeling the property and make sure that tenants have an excellent experience. That way, you won’t have to worry about encountering a low occupancy rate which results in lower income from rentals.
Other than that, you can also include value-adding components to the property. A good method is to set up a laundry service, vending machines, media center, and dog parks. Dog care, covered parking, exercise room, tennis courts, and other useful amenities are also great options. You can also increase your NOI by reducing your operating expenses. You can start with a ratio utility billing system or RUBS which allows you to share utility costs with your residents.
For debt leverage to work, you will have to use these strategies in order get higher returns on your investment. Once you have maintained a good cash flow through leveraging your debts, you will eventually obtain enough resources to buy more properties to grow your portfolio.