Saturday, February 3, 2007

Positive Leverage

This is a simple bit of real estate investment knowledge. Your cap rate should be higher than the cost of the money you borrow. In this case, every dollar you borrow works to better your rate of return. In fact, if you can finance 100% of an investment with "positive leverage", you should. Doesn't everyone invest this way? No. Negative leverage situations can be justified too. Normally this is the case when you expect significant return based on appreciation or by redevelopment. Yes, almost all Bay Area deals fall in to this category.

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