This is the first in what I hope to be a series on "Forgotten Wisdom,"
The Great Roosevelt once said "Walk softly and carry a big stick!" The other Roosevelt taught a dependance on big government. Today, with a perceived problem with sub-prime lending, many are calling for more and bigger government, totally forgetting the wisdom of the big stick.
So what is a stick? I simplest thing we could say it's an elongated piece of wood, but Roosevelt meant a weapon, others see it as a tool, like my walking stick, Archimedes saw it as a lever.
We'll come back to the weapon in another article. Today our concern is it's use as a leaver. Archimedes said " Give me a place to stand and with a leaver I will move the whole world."
Now how does this relate to real estate? In the on going political debate over who cares the most and who will expand government the most to protect us, all of the discussion is about taking away our stick, our lever.
To protect a few from their own irresponsibility, many would deny all of us our lever, those long mortgage loans and limit the placement of our fulcrum. In real estate the length of our stick, our lever is measured in years, in direct proportion to the term of the loan. The placement of our fulcrum is measured in percentage points from the business end of the lever, the end against the house/investment. If we have a 95% LTV, loan to value, then the fulcrum is placed at a point 5% of the length of the lever from the business end. A 50% LTV would have the fulcrum at the middle of the lever.
With the fulcrum in the middle, a 50% LTV, your leverage is twice what you could do with out the lever and fulcrum. In real estate terms if you've financed 50% of a $1,000,000.00 property and it appreciates, goes up in value, 3% your return on investment is $30,000.00 or 6% of your investment.
If the fulcrum is at 5%, a 95% LTV your leverage is ten times what you could do on your own. In our example your $1,000,000.00 goes up the same $30,000.00 but your investment is only 5% or $50,000.00 so your return on investment is not 6% but rather it's 60%!
The forgotten magic of real estate is that thanks to leverage that same $50,000.00 investment can be made to return 3%, or 6%, or even 60% all from the same property!
This is a simplistic lesson there are lots of other factors that enter into real estate investing, but both historically and currently they're almost all positive.
We don't need new laws. We don't need bigger government. We don't need more regulation. The market naturally limits it self, regularly denying some a place to stand based the proverbial FICO, credit, score.
What we do need is to enforce the current laws, for much of the current troubles have come from criminal activity.
Bill
William J Archambault Jr
The Real Estate Investment Institute
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