Bob Nelson – The Use of Leverage

Right now we’re back on the discussions with Isaac Grant about the loan process, and today we’re going to talk about the use of leverage.

Featuring:
Bob Nelson, Eugene real estate investment broker
Marcia Edwards, Eugene residential real estate broker
Isaac Grant, Eugene commercial lending officer

Marica Edwards: Today we’ve got Isaac Grant here with us, Commercial Lending Officer for Northwest Community Credit Union, and we’re fortunate to have him. I’ve learned so much just in the time we spent. Thanks for coming back Isaac.

Isaac Grant: Thank you so much. Pleasure to be here.

Bob Nelson: Let’s go into a concept that I think is really valuable. The use of leverage, borrowing money at a less expensive rate than the property that you invest in. Let’s assume briefly that I could acquire a property that has a capitalization rate of 7%. Restated, the amount of net operating income that I would receive if I owned the property free and clear, divided by its value, 7%. This is the standard for measuring income properties, the cap rate, so if I could buy a property with a 7% cap rate and borrow at a 5% interest rate, I’m going to be making money on money that I don’t even own. Is that a reasonable place to start with you?

Isaac Grant: Yes, Bob. Absolutely. I think it’s important to take a look at the different types of financing available, in order to structure it to produce the results that you really want. as an investor.

Bob Nelson: As an example, one decision might be for what period of time would I lock that interest rate? Is it going to be a variable interest rate or would it be fixed for a longer period of time?

Isaac Grant: Yes, and a lot of that comes down to the risk tolerance of the investor and the borrower. How long do you anticipate owning this property? Do you want to hold this long-term or is this something that maybe you’re going to look at a value add opportunity and then do a 1031 exchange out of it? What the exit strategy is is a really important concept to understand when you’re looking for the right type of financing to acquire an investment property.

Bob Nelson: For instance, if it was a variable interest rate, is there a prepayment penalty if I just pay this thing off when the interest rate changes?

Isaac Grant: There potentially is prepayment penalties, and again, that’s a really important conversation to have with your commercial real estate lender is what that looks like. There are a number of different types of prepayment penalty, and so you want to make sure that you understand what it is that you’re signing up for.

Marica Edwards: I think that if you call Isaac and you call Bob, you’ve got a great team in your defense as you go looking at your long-term planning and your next purchase as well in an investment property. Isaac Grant is at Northwest Community Credit Union. Give him a call.

Join Eugene, Oregon, real estate experts: Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments, and Marcia Edwards, Residential Real Estate Broker with Windermere Real Estate, daily at 5:30 on KPNW for the “Real Estate Today” radio show.