Perfect leverage means different things to different people. The best financial leverage to place on an asset is financing that promotes an alignment between the objectives of ownership and the financial needs of the asset.
Remember that property assets do not have feelings; but people do. Unfortunately, too many investors allow their “feelings” to affect financial decisions. I am a firm believer in bringing in high quality expertise into the mortgage financing decision. There is no reason for you to go this alone or settle for second-rate help. Hire, engage, seek out professional counsel.
This is not a conversation about yield or IRR. Under the presumption that an acquisition is accomplished for long-term hold then financing that matches this objective is concurrently in the best interest of the owners and that of the asset.
Financial leverage was a dirty word for a season. This is not to say people reverted to 100% cash deals. However, the pendulum has swung widely in recent years from commercial mortgages with an interest only component to those requiring 40% cash and a substantial balance sheet to get a meeting.
Think for a moment about real estate financing in Asia, particularly Japan and China. Japan is a democratic society with open and free capital markets; yet for the longest time residential real estate financing was based on a five-year amortization schedule. That’s it.
China is a non-democratic society with highly regulated markets. China has more than thirty cities with a population greater than ten million people in each of these cities! Many are industrial job centers. The government decides what gets built and where it gets built. Think about applying for a mortgage in this environment! How does that make you feel?
The U.S. mortgage system has it quirks, certainly. However, the system is very well developed and very stable with well-known rules and regulations. (We exclude here references to the Fed, quantitative easing, changes in bank regulations, the meltdown of Lehman, Bank of America buying Countrywide, etc).
Finding the right commercial mortgage is the beginning step to applying appropriate leverage to an asset. Utilize the full extent of your network to identify professionals in the field to assist you in gaining access to the right money sources. There are no shortcuts here. It’s very time-consuming, yes. However, if the reward is long-term financial stability the effort is a worthy pursuit.
This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. http://www.MultifamilyInsight.com