Using a little leverage

Regular readers know I’m not a big fan of leverage.

Yes, it has the ability to dramatically improve your results in upside scenarios. But I got started in this business during a total wipe-out and I’m determined not to expose myself or my investors to any real risk of losing properties in the event of another one.

For that reason, and because we were not financially strong nor operationally experienced in the beginning, we have done all of our rehab deals all cash. That is to say, we bought the properties with cash and funded the renovations with cash.

The fact that we have achieved such good results without using any leverage is indicative of the fact that we add a lot of value to deals and also that our timing has been good.

But doing everything with cash is a little crazy, because the additional risk from, say, 50% leverage is minimal and the impact on returns is still pretty nice.

So, tomorrow we’re embarking on a new phase in Adaptive’s history. We found a private investor willing to do a reasonably-priced, low LTV bridge loan on the first rehab deal in Fund 3.

Making the deal was a little expensive and time-consuming, but I believe it will serve as a template for other, similar loans going forward, which should have major benefits for our investors and, ultimately, for Adaptive itself.