Thursday, October 29, 2015

4 Caveats to A Leverage Strategy

If applied on the right property investments and in the right market conditions, leverage is an excellent strategy. Check out this article from “DON CAMPBELL” a foremost Canadian authority on real estate investing. The numbers do not lie - if you pay particular attention to the investment illustration outlined.

But to guard against the ‘downside’, as you look to employ a LEVERAGE strategy, consider the following four “caveats”:

Source: Instphil
  1. Cash Flow is KING – ensure the tenant/revenue base is stable and secure. This includes the covenant of the tenants, lease terms, current occupancy levels, and debt service coverage on current income/expenses.
  2. Low Down Payment means HIGHER MONTHLY PAYMENTS – completing a deal with a low down payment, often becomes problematic if the monthly mortgage payment is beyond a comfortable level. If the market conditions deteriorate and vacancies rise, this problem often will only get worse and the monthly payment harder to meet.
  3. Projecting for APPRECIATION – markets do not always go up, despite recent trends, and you must be realistic in assessing this variable, both with respect to your own market and the specific properties being targeted. In a stalled or declining market, properties which have stable cash flows thrive and are insulated from a negative market.
  4. Maximum Leverage vs. POOR INVESTMENT – no money or low down payment deals on a poor investment property, typically leads to negative results. Do not let attractive leverage opportunities, compromise your ability to stay the course on targeting good property investments.
Leverage is a great strategy, but it requires sound discipline in its application.

Tells us about your use of leverage in your market. Again, we love to tell you about our own backyard here in Windsor-Essex, so feel to reach out to us!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

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