Are you ready to know whether leverage is risky or not?
Robert says that the common belief that leverage (using borrowed money to invest) is always risky is incorrect. He explains that leverage is only risky if you invest in assets where you have no control. If you can control your investment, you can apply leverage with minimal risk.
For example:
1. A $17 million apartment complex can be a safe leveraged investment because the investor can control its value by managing rent collection and operations.
2. On the other hand, leveraging a single house is risky because its value depends on market forces and currency fluctuations, which are beyond your control.
So, what is control?
In this book, Robert emphasizes the importance of control in investing. Unlike paper assets like stocks and bonds, which offer limited control, real estate and business investments allow you to manage key factors directly—such as income, expenses, and leverage.
The diagram shows four main controls investors and bankers want.
Is financial intelligence really the key to control?
Robert explains this using an example of a 300-unit apartment building in Tulsa. After buying a property, the first step is to increase the rent. The property is already profitable, but the goal is to raise the rent by $100 per unit over three years. Here’s how:
1. Buy the property, then increase the rent.
2. Add washers and dryers in each unit and charge extra rent for them.
3. Improve the property by adding new landscaping and fresh paint.
These upgrades will be funded by a bank loan, not out-of-pocket. Over three years, raising rents across 300 units adds $30,000 a month, or $360,000 a year, to the income. This strategy uses leverage—bank money and control over the property—to increase income without needing more capital from investors. It’s all about using knowledge to make the property more profitable.
Robert also explains how reducing expenses can help increase profits. One way to do this is by cutting administrative costs, like accounting or legal fees, especially when managing multiple properties under one company. Other expenses, like insurance, property taxes, and maintenance, can be lowered through better management.
He also highlights the importance of reducing tenant turnover. When a tenant moves out, acting quickly to advertise and prepare the apartment for a new tenant can reduce vacancy time and boost income.
Poorly managed properties tend to have rising costs, making them bad investments. However, the author suggests that with good management and improvements, these properties can be turned into profitable ones. Essentially, you can make money by fixing others mistakes.
