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TRUMP UNIVERSITY WEALTH BUILDING 101

will achieve a competitive yield, growth, and protection against infl ation with
rental property.
Leveraged Returns

The previous discussion assumes you own your stocks, bonds, or property
free and clear of debt (i.e., unleveraged). Nearly all financial advisors agree

that investors should not borrow (and, in most cases, cannot borrow wisely)

to acquire and/or finance stocks or bonds, because borrowing costs too much
and poses too much risk.
Investors, however, can and do safely use debt to finance rental proper-

ties. To illustrate, let’s do the math on a leveraged property acquisition.
Positive Leverage Boosts Cash Yields You fi nd a duplex priced at $200,000
that yields 7.5 percent. Instead of paying all cash, you acquire this property
with a $160,000 mortgage, 6 percent, 30-year payoff (amortization). You put
up $40,000 (i.e., your out-of-pocket cash) as a down payment. By leveraging
your purchase, you boost your annual income yield from 7.5 percent to 8.44
percent. Here’s the math:

Net income (.075 $200,000) $15,000
Annual debt service ($160,000 @ 6%, 30 years) $11,624

Cash flow less debt service $3,376
Leveraged return from cash fl ow (R) Cash fl ow/Cash invested
R $3,376/$40,000
R 0.0844 or 8.44%

At first glance, you see that the amount of your available yearly income
fell because you must pay your lender, but the yield on your cash investment
climbed.
This simple example illustrates the method you can use to calculate
leveraged returns from income. Depending on the property and terms of

financing, your numbers can vary. In practice, investors often negotiate prop-

erty price and terms of financing to meet some targeted “cash-on-cash” return
objective. If they can’t get the numbers they want, they search elsewhere
(other properties, other cities). Most investors rely on leverage (OPM—Other
People’s Money) to enhance their annual yields from income.

Do Lower (or Negative) Cash Yields Make Sense? In today’s competitive
marketplace, many investors accept leveraged yields from annual cash fl ow

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