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We now find ourselves at the end of this blog series which I cover real estate “cheat codes.” In the last post, I touched on the importance of planning for surprises, understanding the market in which you operate, and emphasizing cash flow over appreciation. In this post, I will cover the significance of using leverage wisely, buying and holding your property, and location. I’ll note that the section on location in this post builds off of what I talked about in part 2 of this blog series where I covered understanding the market and I will leave that section short because it’s easy to understand. With that being said, let’s jump into the post.
Use Leverage Wisely
Leverage/debt is a powerful tool and it’s vital that you understand the risks associated with being overleveraged. There are many debt products such as bridge loans, seller financing, adjustable-rate mortgages (ARMs), fixed-rate debt, etc. Each product has their own nuances and it’s important that you’re able to create a plan for how to pay back the debt and be able to model it correctly. For example, if you’re renovating a property that doesn’t meet the standards for a fixed-rate loan, you’ll likely get a bridge loan. Prior to even going under contract, you should confirm with your general contractor how long each unit will take to turn. In addition, you should communicate with your property manager how long the units will take to lease. Given those two critical pieces work within the confines of the deal’s economics, proceeding with bridge debt would likely be a good idea.
Given that you’re able to wrap around whatever debt product it is that you’re using, leverage is your best friend. As a matter of fact, the entire financial system we have today revolves around credit! If everyone walked around paying everything in cash, the economy would be incredibly slow moving. You may hear popular financial gurus say how having debt is bad, and most people believe that to be true. The fact of the matter is that leverage, when used wisely, is what compounds wealth. If you want to understand debt in more finer detail, I encourage you to read the “debt” section on the glossary page of our website.
Buy and Hold
Real estate is a long-term game. Cash flow comes in monthly and it’s (usually) only after years that your property has appreciated enough to warrant selling it. Investors shouldn’t expect to get rich overnight. Investors should focus on building a sustainable portfolio of properties over time. That portfolio could be the foundation to providing financial freedom if the size is large enough.
At JP Acquisitions, we invest knowing we will hold our assets for several years as opposed to selling within 12-36 months. However, because of economic cycles, it may make sense to sell early. The Federal Reserve and their ability to shift the federal funds rate is primarily what causes asset prices to adjust. Prices have, or at least are starting to, adjust to interest rates and as a result prices have dropped for real estate. Since rates have jumped so much, buying in today’s market may lead to large gains once interest rates drop in the future. I emphasize the word “may” in the other sentence because an investor should not underwrite hoping that the fed will drop interest rates in the future. It’s the factors that are least out of your control which you should most conservatively underwrite. Nevertheless, buying and holding a property is a tried and true strategy for building cash flow and compounding wealth.
Location is Everything
When it comes to real estate, location is critical. The location of a given property could make or break a deal. You’ve likely heard the common saying in real estate of “location, location, location.” When you’re looking to purchase a property, you’ll want to make sure that the given property is close to schools, amenities, job opportunities, transportation, etc. While not all properties can be close to the places I mentioned, the closer your property is to them, the higher the chance your property will appreciate more. Needless to say, having your property close to the places that I mentioned spurs activity which means that people will want to be there. Regardless of what real estate asset class you invest in, the importance of location holds true.
Conclusion
Having read this post, you now understand the importance of using leverage wisely, buying and holding property, and location. Leverage is a powerful tool in real estate and while it’s a thing of beauty, being overleveraged can result in disastrous consequences. When it comes to the holding period of an asset, you should plan on holding your asset for the long term as opposed to selling it within a short period of time. Planning to hold an asset will protect you from being disappointed if economic conditions don’t pan out the way you predict. Furthermore, when narrowing down a location for a property you want to purchase, you should seek to place an emphasis on close proximity to schools, amenities, transportation, etc. Having those places by your property increases the chances that there will be demand in the area and your property will appreciate.
If you have any questions regarding the terms and concepts in this post or previous ones, don’t hesitate to reach out to either me (tedi.nati@jpacq.com) or someone on our team so we can help explain what is causing the confusion. If you’re interested in investing with us at JP Acquisitions, you can contact us via email (contact@jpacq.com), LinkedIn, Instagram, or our investor portal to set up a meeting.
As always, I hope you enjoyed reading this post as much as I have writing it. Best of luck!
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About the Author
Tedi Nati is the Managing Partner of JP Acquisitions. In his role he is responsible for broker outreach, establishing deal flow, underwriting, marketing, and assisting in the closing process. In addition to his role at JP Acquisitions, he is an Assistant Equity Underwriter at Cinnaire, a non-profit Community Development Financial Institution (CFDI). In his role at Cinnaire, he is responsible for assisting the underwriting team in evaluating and structuring real estate equity investments and assessing the risks and mitigants associated with such. Tedi earned his Bachelor of Science in Finance from DePaul University, where he graduated Summa Cum Laude. In his free time he enjoys reading, writing for his blog (tedinvests.com), looking for multifamily deals, working out, and researching stocks.
Make sure to always do your own research before making any final decisions on buying/investing real estate, stocks, or other securities. I am not a CPA, attorney, insurance, or financial adviser and the information in this blog post shall not be construed as tax, legal, insurance, construction, engineering, health and safety, electrical or financial advice. If stocks or companies are mentioned, I sometimes have an ownership interest in them – DO NOT make buying or selling decisions based on my posts alone. If you need such advice, please contact a qualified CPA, attorney, insurance agent, contractor/electrician/engineer/etc. or financial adviser.
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