How to Leverage Without a Loan

My latest sale of an Aspen property nearly tripled the cash I put into the property in less than 2.5 years. How do you do this? Leverage by loan, or if you can find the opportunity leverage without a loan. Also, you must be knowledgeable in historic market cycles and gamble that the cycles will repeat themselves. I have tracked the cycles since 1970, which of course gives the advantage.

The concept is similar to buying stocks on margin. If the stock goes up, you multiply your gain, but if it goes down you are at risk if you have to sell. So caveat emptor or buyers beware, these scenarios are theoretical and should be discussed with your accountant as individual tax consequences may vary and if the market tanks you need to be able to cover the downside.

Let’s take an example. If you buy a property for $1,000,000 and pay the entire amount in cash in a market of 10% annual appreciation, your one million grows to $1.1 million, before expenses and income tax on the profit or loss.

On the other hand, if you put 25% down or $250,000 and you get the same $100,000 growth, you have just “earned” $100,000 on $250,000 less expenses, income tax and mortgage. If the return exceeds the interest rate on your loan you multiply your gain.

Simply, $100,000 earned on $1 million compared to $100,000 earned on $250,000, even after you deduct mortgage expense, is a favorable situation. However, this is risky and you need to be able to cover the downside if the market tanks. I’m very, very conservative, so I never borrow more money than I have in cash reserves.

Can I get this same $100,000 return without a loan or paying cash? Yes, rarely, but in theory, yes. Let’s say I buy the same property as a pre-sale, put $250,000 down, but do not close or occupy for two years. With the same appreciation (10%) rate your one million increases $100,000 on a 25% deposit of $250,000. However, now I have no mortgage payments, no expenses and I would receive a nominal interest rate on my deposit money. Caveat emptor again- buyers beware; these scenarios are theoretical and should be discussed with your accountant.

The Wagarisms to remember are; #1 Leverage, leverage, leverage can improve on location, location, location but you must be smart, smart, smart; #2 The greater the commitment and risk, generally, the greater return or the potential loss.

The Monarch pictured below is an example of a pre-sale opportunity. Obermeyer Place, which I also handled was another example of a past pre-sale opportunity that worked well for buyers.

Change in results rarely happens until you change your thinking. Or one definition of insanity is using the same thought process over and over again and expecting a different outcome.

With kindest regards, I remain,
Sincerely yours,
Rich Wagar

In The News:

Local Real Estate on a Hot Streak

By Joel Stonington
July 26, 2006
Aspen Times

The Aspen real estate industry rarely took a breather during the first half of 2006.

Heading into the heart of summer and busiest time for showings, the dollar volume from all sales in Pitkin County is already 17 percent ahead of 2005’s record pace, according to research by a title company.

Land Title Guarantee Co.’s latest monthly report showed that sales reached $1.25 billion in Pitkin County from January through June. The mark at the same point last year was $1.07 billion.

“Not only do people want to live/vacation in the Roaring Fork Valley, but buyers from around the world continue to view the valley as a great place to invest,” said Mark Pisani, director of marketing for the title company.

Despite “challenges” with low inventory in some parts of the market, Pisani envisions a strong second half of the year, regardless of national trends.

“As the national economy remains strong and interest rates rise, the purchasing power of the middle-income buyers may be reduced. However, the market for the affluent buyers will remain strong,” Pisani wrote.

Brian Hazen, a partner in Coates, Reid and Waldron, said real estate agents at the firm were “bullish” on the market at a recent sales meeting. “We’re essentially very optimistic,” he said. “Sales are very strong.”

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