Using leverage to hit target returns vesus cash

[Keith A.]

We are looking to have a 15% minimum cash on cash return for our investments whether SFH or MFH. We are cash buyers and are looking to buy all cash and then possibly leverage afterwards with a cash out refi.

When analyzing deals using all cash, the returns most of the time come in under our target but then if we leverage the returns are great.

Is this something others see when doing this and either accept the lower return using all cash or leverage to get a higher return?

Thanks in advance.

[J Scott]

Bill's concise answer is spot on -- and that's why they call it leverage, as you are leveraging other people's money to increase your returns (again, assuming cost of capital is lower than returns).

As for whether you should do it or not, that's a personal decision. Leveraging will increase your returns in many cases, but it also will add risk, as a large drop in value can put you upside-down and you will have debt service payments.

You need to decide if the risk/reward tradeoff is worthwhile, and if so, how much risk (how much leverage) is right for you.