Blog

Leverage

My first lesson in real estate was when I was 12 (30 years ago). My mom, a hairdresser, rushed home with big news that was to have a huge impact on my life. One of her customers was married to a zoning commissioner where we lived in Louisville, Kentucky and let it slip about a new mall going in on a street named Outer Loop. The mall, Jefferson Mall, was to be the largest in Kentucky. My mom promptly went shopping for rental property in that area…it took several months but she was methodical and relentless. What she found was a 2 bed/ 1 bath, 40 yr old frame house for 30K. It rented for $300 per month so she was REALLY happy. Why was she so happy…it was directly across the street from the mall (at this time it was just an overgrown field), and it was on a double corner lot. In addition, it was making enough rent in the interim to pay for itself. I bet you see what is coming!

Anyway about 5 years pass and the mall is now built, and traffic count is through the roof. The city expanded the road by 1 lane in each direction and paid mom a little money for a strip of land to expand the road. The next people to knock on her door were the companies that build gas station/ convenience stores on those corner lots in high traffic areas. They offered mom 275K for the double lot! She agreed but with conditions. She wanted them to buy her dream house…so she identified a beautiful home in the prestigious Oxmoor Woods Subdivision and had the company buy it. She then did a 1031 tax deferred exchange of the double lot for the dream home so her cost basis for the dream home was about 30K!

Years pass and capital gains tax laws change. She decided to sell her home for over 400K (remember the 370K in capital gains) and it is totally tax free because she lived in the home as her principal residence for 2 of the past 5 years. What was the ROI of that investment? It is especially good if she didn’t use all cash for the initial 30K purchase price….think about it is all about...leverage. Leverage your creativity, connections, credit, and final leverage you cash to earn greater ROIs.