SLO LIFE Winter 2010

| real estate
leverage
A powerful tool if you know how to use it.
Despite the recent correction in the housing market, it’s no secret that real estate remains the greatest source of wealth creation nationwide. SLO LIFE
Magazine set out to ask local real estate professionals: “Why is that?”
And, while the answers were varied, every single person we talked to touched on the power of leverage.
Leverage, as it pertains to real estate, means “borrowing money” and derives from the word “lever,” which, of course, can be used to create a
tremendous amount of force. Here is how it works:
Let’s say you buy a $400,000 home with a 20% down payment ($80,000) and the bank loans you the remaining 80% ($320,000). The word “leverage”
is appropriate because, like the strength you gain by using a lever, you have gained more purchasing power by borrowing money. You essentially buy a
$400,000 asset for just $80,000. Of course, now you have to repay the bank, but here is where the power of leverage kicks in.
Let’s assume that real estate continues on the same trajectory it has been on for the past 100 years and it gains in value of 2% over the rate of inflation
(this is the average of all the bubbles and recessions during that time frame). So, just by living in your home and not including any improvements you
may make, your investment creates $8,000 ($400,000 x 2%) of wealth in the first year alone. When measured against the original down payment, that is
a 10% return on your cash investment ($8,000 / $80,000 = 10%) which is pretty hard to find these days.
Now, imagine that you live in this home for 20 years, through the magic of interest compounding at an annual rate of 2% that same $8,000 will turn into
$194,379. After 30 years, the gain would be $324,545 plus, by then, you would have probably paid off the original principle balance.
All of this is made possible by leverage, which is the borrowing of money to make the purchase possible. Of course, we all got carried away with the use
of excessive leverage during the bubble, but now may be a great time to revisit the concept. You can continue to track what the market here in San Luis
Obispo is doing by watching the numbers below, but your best bet is to find a house that you will be happy to live in, make a significant down payment
(20%), be happy, live the “SLO Life,” and let power of leverage and compounding interest do their thing. SLO LIFE
the numbers at a glance
Comparing the last four months to the same period last year (07/01/09 - 10/31/09 vs. 07/01/10 - 10/31/10)
Home Price
$100,000 - $500,000
2009 2010 +/-
Home Price
$500,001 - $1,000,000
2009 2010 +/-
Home Price
$1,000,001 - $2,500,000
2009 2010 +/-
1. Total Homes Sold
30 31 3.33%
51 45 - 11.76%
2 4 100%
2. Average Asking Price
$447,565 $430,861 - 3.73%
$684,163 $687,993 0.56%
$2,322,500 $1,876,750 - 19.19%
3. Average Selling Price
$431,982 $416,984 - 3.47%
$658,063 $659,909 0.82%
$2,087,500 $1,643,750 - 21.26%
4. Sales Price as a % of Asking Price
96.52% 96.78% 0.26%
96.19% 95.92% 0.27%
89.88% 87.58% - 2.30%
5. Average # of Days on the Market
73 69 - 5.48%
83 111 33.73%
393 247 - 37.15%
SOURCE: San Luis Obispo Association of Realtors
38 | slo life magazine