Leverage without psychological stress
We know investors - one of them will recognize ;-) - which we claim to know people who have become rich with real estate but none that are enriched by the actions.
These individuals are "blinded" by factors specific to real estate, a sector that has been very favorable factors in recent years:
- illiquidity of the property that has protected investors for costs related to purchases / sales and the repeated price fluctuations over short periods.
- rising property during the last 50 years with an unreasonable increase in the last 10 years (but as we have seen since 2008, this increase is not eternal).
- favorable taxation: tax cuts, not tax capital gains on real estate ...
- leverage important.
We will look into this more leverage. Indeed, any purchaser of a property generally benefits from a privilege that sublime any return : the bank loan.
demonstration with an example:
lambda Imagine a household that buys a house worth 200 000 EUR. To buy this property, it makes a contribution in cash of EUR 20 000.
==> its leverage is therefore 200,000 / 20,000 = 10!
This means that if his property value is 2% per year, saw its household wealth grow by 2% x 10 =
20% per year!
careful, because leverage can become "club effect" . If the property loses 2% of value every year, the household instead sees its real estate decline of -2% x 10 = -20% per year!
If the household has acquired the property for rent and the rent is logically indexed to the value of the property, it is highly likely that income from the property down while at the same time the cost of credit remains the same, or worse, it can increase!
For this simple example, we schematically show you that leverage, as part of a real estate investment can yield sublime only when the following conditions are met:
- increase the value of
- banking system that lends easily
- accommodating rates: preferably as small as possible and stable in time (= fixed rate preferred)
- a household's ability to repay its debts until the end of banking credit.
Finally, we must not forget that this more leverage, the higher the household debt is relatively . This means that all "addicted" to the initial plan can be fatal to the couple's property: various incidents on the property not covered by insurance, lower incomes who can no longer ensure the load credit, falling house prices ...
So many events that can be heavy and that therefore any investor in the stone must not be ignored. The gain may actually be important, but many risks are present.
A Value and Profit, we appreciate another leverage that can acquire assets less expensive than their value "economic" and without leverage: leverage accountant or leverage Technical .
While this leverage can rarely achieve a multiplier effect 10 or more, but it offers the advantage of giving the user a high safety margin. In our view the risk / reward ratio is more favorable to leverage technology to leverage related to the purchase of a property due to zero debt .
Indeed, in our approach, more leverage, the higher the risk is low. very opposite of what we saw for real estate.
us apply this leverage technique with an example of an investor in the value
He spotted a security whose value of net tangible assets of all debts (financial, suppliers, taxation, ...) is 10 million EUR. Outside the company is publicly traded and valued for 5 million euros. The icing on the cake, the company made a profit. This confirms some assets: book value and economic value seems consistent.
If the investor acquires the title that values the company for 5 million euros, leverage technology will be:
EUR 10 million (net asset value of debt) / EUR 5 million (market capitalization of title) = 2
You understand that if in an excess of pessimism vendors lead the market capitalization of the company at EUR 2 million and the net asset value is maintained not only the buyer's leverage multiplies (it increases from 2 to 5!) but also decreases the risk exponentially.
What conditions can benefit from a good leverage technology?
- any type of market (bull or bear)
- Assets whose value is stable over time: cash, receivables, real estate (Residential> Real Estate Business> storage> industrial real estate> land).
The biggest advantage of the leverage technique is that it requires no debt and applied for certification as a company that makes profits, you increase your chances of increasing your performance .
We will see in a future article the other two leverage within the reach of the investor: the purchase of securities on credit and private equity.
