But even with all those tweaking, you could only yield so much change in the return on investment.
What would really affect your returns is a simple “secret”… a method used by most veteran condo investors. They have used this secret to make even more money and aggressively grow their condo portfolios.
With this method, an investor can significantly magnify their investment returns from 5 to even 100 times!
So, what is this “secret” anyway?
And the secret is…
Leverage, or more precisely, other people’s money (OPM).
This “secret” is already well known to most veteran condo investors. Those who are new in the game are a bit more reluctant to use this method, thinking that they would lose money by doing so.
Of course, investors who are just starting out don’t usually know that they can access OPM and amazingly multiply their profits. Because of this, they are limited to using their own savings.
Imagine all that potential returns being left on the table.
If you want to learn more about how to use OPM to make more money in condo investment, then read on.
How Do You Get OPM/Leverage?
How exactly do you get OPM? The short answer is you’ve got to earn trust first, and the rest will follow.
The longer answer is that you have to develop relationships with potential co-investors. Then you prove to them that you can deliver the results you promised. Once they do, they’ll usually give you money to invest in.
Condo investment is a game of trust and money: nobody will invest in someone they don’t believe in.
For a starting investor, the key would be to generate good returns with small condo investments first. You can then use that as a proof of concept for other co-investors.
How to do exactly that would be a subject of another post. For now, it’s enough that you remember: No trust, no OPM.
Two Forms of OPM
OPM may come in two forms. Depending on what form you use in your investment, your returns would vary.
The two forms are: Debt or Loans and Equity.
Loans may come from other banks, other financial institutions, or even lending investors/individuals.
Equity may come from investment companies, professional individual investors, or even your friend and family.
Depending on your past performance and the trust you have earned, you may gain access to any one of these channels should you be qualified to do so.
Key Differences in the Forms of OPM that will affect your income
These forms have two key differences that will affect your returns.
- Costs –Loans are usually cheaper than equity. This follows the risk-return framework, where giving loans are considered less risky than giving out equity.
- Cash Outflow – Though cheaper, loans have one big disadvantage: they suck cash out of your business!
Because of the fixed repayment period of most loans, you have to pay back the invested capital in the business using the income of the investment property. Over the short term, this would significantly affect your capability to re-invest the money.
On the other hand, an equity investment normally doesn’t have a fixed payback period, and you will therefore be able to manage cash flows solely coming from the rental income or other recurring income from the condo investment.
Pro-Tip: Managing Debt Payments to Boost Your Returns
Once you have some experience in loans, you could talk to your bank or whoever your lender is for better terms. I suggest you negotiate on three important things: interest rates, frequency of payment, and amount of amortization.
- Interest Rates – obviously, the lower this is, the better for you. However, if you’re looking at better cash flows, the next two items are more important. You may have to give up some interest rates so you could negotiate for the next two items here.
- Frequency of Payment – negotiate for less frequent payments, say, quarterly or semi-annually. Why? Because you could reinvest the money in some other earning assets. This would offset your interest payments. For example, you could invest the money in 3-month bonds making 2% per month, or even participate in better quick-flip real estate deals. I suggest you use the money with caution though, as you don’t want to default in your loan.
- Amount of Amortization – you could also suggest a back-ended amortization, which means that you pay a low principal amortization at the start of the loan, and pay a large amount at the end of the loan. For example, a five-year or 60-month loan can have 50% of its principal paid in the first 59 months and the last 50% at the 60th month. If you plan to flip the property before the end of the 60th month, then this is very beneficial to you.
WARNING: The Danger of Debt as Leverage
Despite its benefits, debt is still one dangerous tool to use. Failure to pay it would mean that you could lose the great condo investment you found. Experience in dealing with lenders and negotiating good terms, can somewhat mitigate this danger. Be very careful in using this tool to boost your returns. If you need some advice regarding debt, send me a message here.
Leverage, whether from debt or equity, can magnify the returns from your condo investment if properly used. Study every deal thoroughly, and how you could integrate leverage in it. Once you do this continuously, you’ll be well on your way to building your own real estate empire.
Condominiums for Sale: Three Central, Two Central, Salcedo Skysuites, Greenbelt Hamilton and Paseo heights.
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