I bought a deal with negative leverage. Here's why...
I bought this townhome community with NEGATIVE leverage going-in. And don't regret it...
What's negative leverage?
When your cap rate < interest rate.
In this case, we bought this property at a 5.5% cap and locked in an interest rate of 6.7%.
Some would argue it would be cheaper to buy the property in cash.
So why the heck would anyone buy a deal with negative going in leverage?
✅ Future Upside Potential
In our case, we were willing to accept a lower yield in the beginning, in exchange for a higher return at stabilization.
Our stabilized cap rate is projected to be close to 10%. With a yield on cost at 8%.
I could care less what the going-in cap rate is, as long as I see a path to substantially add value to the property.
Many value-add investors do exactly the same thing.
What are your thoughts about buying deals with negative leverage going in?
Most Popular Reply
With interest rates today, a lot of deals are negative leverage. Upside is key whether forced appreciation or speculation that the area is going up. The other reason is if you think rates will go back down historic lows. 5.5% cap looks like a no-brainer if you refinance to a 3.5% rate later down the road.