Page 8 - Venture - State of the Market 2020

First, it is important to remember But it is, you just need to be pre-
this about planning:if you fail to pared for the worst case scenario.
plan, you plan to fail, and your plan Expect the best but prepare for
will fail. You need to have clear the worst. Now higher leverage
goals of what you want to accom- means your return will be higher
plish in 20 years. I recently met but you need to know what you
with the President of a University value most and if you are raising
over lunch and I asked him, how capital, what your investors value?
do you plan and how have you You need to know. Yes, most
planned? He thought and said, investors want the highest return
well when I was 20, I wrote down on their investment but not all. If
with a pencil and somepaper while an investor just wants the highest
return, they will consistently be
sitting on the ground next to my
HOW TO PLAY sister’s bed, two columns: One col- looking for that. If they believe in
umn of things I wanted to accom-
you and your values, they will be
plish, then I wrote down the crazy with you for the long term. How
THE LONG column of things I really wanted to does leverage work? Here’s a
simple example.
accomplish.
I then had to decide which col-
GAME umn to go after and right then How do you calculate leverage in
real estate?
and there, I decided to go after
the crazy column. He said his life
has gone through ups and downs, To calculate leverage for your
but it’s amazing how many of the rental property, simply divide your
ANDREW LANGSFORD things he planned for at such a investment property financing
young age, have come through amount by the property value. This
and come true. is also known as the loan-to-value
ratio.
THE KEYS TO PLAYING THE So what does your portfolio look
LONG GAME: like in 25 years? What type of Why do you need leverage in
properties do you want to own? real estate?
When I told some people we were Multifamily, retail, hotels, industrial,
going to build a 119 unit building, single family? 5,000 apartment Leveraged real estate investing
many looks were of disbelief, but units, 10 single family homes paid can increase the profit margin
most of the looks I now know were off? What areas do you want to on your investment properties.
caused by a lack of understand- invest in and why? What type of For example, let’s say you have
ing. As a throwback to the cover of appreciation historically does that $50,000 cash on hand. You can
my partner Brian Scalabrine, most area have? What rents will be use that money to do 3 things:
don’t know how and aren’t willing achievable? How much money
to shoot at that hoop. Why go will you need? Write that number 1. Buy a $50,000 investment prop-
through the challenge and have down. Who do you want on your erty with all the cash you have on
the potential of a major catastro- team and why? Will you bring in hand. This equals a 0% leverage.
phe and great failure? Great ques- all the capital, will you partner, or
tion and I’m glad you asked. We’re syndicate each deal? 2. Buy a $100,000 investment
going to break down the keys to property with the $50,000 cash
planning for the long game in real Next, and equally as important in you have on hand and use an
estate. I don’t mean long game my mind, is leverage. I used to investment property financing
as in winning the high school D think you should leverage all you method – like a bank mortgage
league sectionals. I’m talking NBA can, up until the Great Recession. loan – to borrow $50,000. This
championship level for your per- The great regression of my prop- equals a 50% leverage.
sonal financial freedom and legacy erty values happened very quickly,
for your children’s children. and in those moments I thought 3. Buy a $200,000 rental property
leverage wasn’t so great. using the $50,000 cash you have
So, now that we’ve set the stage on hand and use an investment
for the real long game. Let’s talk property financing method to
planning. borrow $150,000. This equals 75%
leverage.
6 VENTURE | 2020 STATE OF THE MARKET