How To Understand The Power Of Leverage When Investing In Mobile Home Parks

How to appreciate and harness the power of good leverage in investing…

Leverage remains the most misunderstood and most underutilized ally for investors today. But it also remains the most powerful tool available to savvy investors who get how to use it efficiently and wisely.

There are several types of leverage available to investors and a number of them come into play for mobile home parks investors whether they realize it or not. This includes; leveraging other people, and the market. Then there is financial leverage. Some fear it like the plague, some abuse it and go broke. Others continue to use it as dynamic force for hacking wealth and income, in a sound and sustainable way.

So how much does leverage really matter? What types of financial leverage are available to mobile home park investors today? How are sophisticated investors using leverage differently? What is the right balance of leverage for you right now?

Leverage vs. No Leverage

We are all very aware that too much leverage, used in an unsustainable way can be risky. It’s no secret that there is a sizable percentage of the population which hasn’t been taught to use financing well. They are constantly sold on financing deals which end up being more costly and counterproductive. However, there is undeniably a distinct difference between good and bad leverage. Even the most adamant anti-debt gurus like Dave Ramsey continue to promote real estate financing as the one exception to the rule, and a sound financial move.

The bottom line is that financing is just like money. In itself it is not good or bad. It is how you use it.

So let’s just look at the cold hard numbers and math of using leverage versus no leverage to invest in real estate…

Scenario A: All Cash Purchase

Property purchase price: $100,000

Annual gross income: $10,000

Annual gross cash on cash return: 10%

10 year gross return: 100% / $100k

Scenario B: 90% Financing – 10% Cash Investment

Property purchase price: $100,000

Annual gross income: $10,000

Annual gross cash on cash return: 100%

10 year gross return: 1,000% / $100k

Scenario C: Multiplying the Initial Investment

Taking the initial $100k, and purchasing a larger property with 90% leverage, or 10 smaller properties with 90% leverage, really unleashes the power of this financial tool.

Property purchase price: $1,000,000

Annual gross income: $100,000

Annual gross cash on cash return: 100%

10 year gross return: 1,000% / $1M

If you had $100k to invest, would you rather earn a 10% or 100% annual returns? Would you rather generate $10,000 a year, or $100,000 a year in income with that capital?

Yes, there will be debt service, taxes, and other expenses. Yet, there are also tax deductions, and appreciation to be factored in. Would you rather enjoy 5% appreciation on a $100k property, or a $1M property? Even at a fraction of the improvement, the ROI and power of leverage for investing in mobile home parks cannot be ignored.

Ways to Leverage Your Mobile Home Park Investments

There are multiple ways to leverage mobile home park investments including:

  • Bank loans
  • Commercial mortgage lenders
  • Seller financing
  • Investor partnerships
  • Friends and family
  • Real estate crowdfunding
  • Hybrid combinations of the above

Among these leverage options there are many creative ways to structure deals:

  • Lease options
  • Wrap around mortgages
  • Cross-collateralization and blanket mortgages
  • Bridge loans
  • Lines of credit
  • Balloon mortgages

Whatever your personal credit and financial situation, and belief about debt versus equity there are ways to structure mobile home park deals and gain leverage in a sound and flexible way. If you don’t like debt, even non-recourse loans, then use equity funding. If you don’t like having partners or splitting the pie, then use debt financing. Or mix it up with the two of them.

The Pros and Cons of Full Leverage vs. No Leverage

‘Full’ leverage might conjure up mental images of 125%, subprime mortgage loans, but that’s not what we are talking about here. Investors are absolutely wise to build up equity over time, and preserve their flexibility to sell and restructure financing in the future, while increasing net cash flow.

Full leverage can be defined as having full access to any capital invested, and enjoying liquidity. We see this when startups make it to IPO. Look at Mark Zuckerberg. He pulled together $1,000 to start Facebook, and made it to IPO, which gave him Facebook stock worth around $45B in 2015. He has more than fully leveraged his initial investment, and can now sell and donate that stock to philanthropic efforts. Similar results can be achieved by refinancing as value accumulates in a mobile home park, or by bringing in partners, or leveraging equity to acquire additional parks.

Note that high loan to value (LTV) financing isn’t always a bad thing either. However, there is a big difference between maxing yourself out with no protection from the down side, and no flexibility, versus those that have very manageable debt and enough financial reserves to ride out any soft periods. Staying leveraged can even reduce risk. It reduces exposure to risks of damage, natural disasters, and malicious lawsuits. The diversification that full leverage offers reduces performance risks, and increases consistency and overall long term returns.

Put simply; a plan to achieve full leverage can ultimately provide the best combination of high returns and low risk.

Pro Tip: Understand your season in life, and the level of leverage which will give you the most peace of mind. If you are hungry for growing income and wealth then a more aggressive structure may be necessary. If all you seek is wealth preservation and slightly enhanced passive retirement income later in life then you may enjoy a more conservative approach.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s