Myles of Investments

Read about my successes and failures. Learn from my experiences and gain insight without losing any cash!!!

Lesson: Catching a Falling Knife
Lesson: Currency Exchange
Lesson: Mutual Fund
Lesson: Paid to Wait
Lesson: Pricing in a Downturn

This is where you’ll find find my Blog. I will comment on the latest news relating to investing, real estate, and the financial markets.

Example of Financial Leverage – Preconstruction Flips

A preconstruction flip is a great example of financial leverage for investors. With a minimal outlay of money you have access to an asset that grows in value along with the market, often at no maintenance cost to you.

This is perfect for an investor who can be patient with the investment for a few years. Often, there are building delays, but these can work in your favor, as the value of the property increases over the time, but your carrying costs, are little or nothing. Look for a reputable builder, because you can’t get paid if it doesn’t get completed! Just think, every extra year it takes to complete, you have the growth of the market, and your original purchase price stays the same. In effect, by the time the project is completed, you paid a price that is 2-5 years old! All of this, and you have virtually no carrying costs. Typically this example of financial leverage works well in major urban centers in transitional areas, where a gentrification is in progress. This means by the time the project is completed, your building will be in the next hot spot!

Here is a real life example of financial leverage in a preconstruction condo. A couple of friends of mine talked to a realtor, and arranged to go to a realtors open house for a preconstruction sale. These usually carry the most risk, but allows the first investors to put down lesser amounts of capital to secure a unit. Before they attended, they agreed to split the cost and profits to make the purchase more affordable. They purchased the unit with the help of the real estate agent and only a few thousand dollars. Since, on these type of investments, the deposit payments are usually spread over time or staged at project deliverable dates, it makes it easier still, to be able to come up with the investment money, and they each had several months where they could save for the remainder.

By not being greedy and sharing the potential gains with someone else, and using a real estate professional they were able to show me solid evidence of an example of financial leverage that really works. As I tell you this story, their condo has appreciated by almost forty percent and is sill growing, and my friends have the option to either sell the condo or to hold it and rent it our for more gains and appreciation.

When buying into a preconstruction sale, you may want to consider holding the unit for at least one year after it is built to avoid the overabundance of units on the market. This often occurs as all of the other investors try to extract their gains, and they may be willing to accept a lower price. If the unit has taken a few years to grow in value, it is likely that you will be able to achieve a positive or neutral cashflow situation as a rental unit. This can give you the best of both worlds, positive cashflow and appreciation, and is a great example of financial leverage.