Well, after my last couple of blogs, I can not neglect to mention leverage and my thoughts on how to use it today in the the Edmonton real estate market.

Most of you no doubt know that leverage refers to how much debt one uses to purchase something. A general rule of thumb is that the more leverage one uses, the greater one's return on investment. Sounds great, doesn't it? Well, there is another rule of thumb; the greater the leverage one uses, the greater the risk also. Someone once told me there is an old Chinese saying (why is there an old Chinese saying for everything? One of these days I'm going to check out the veracity of these claims) that you have to go into the tiger's den if you want to get the kittens. Well, leverage is certainly going after the kittens in every respect - risk and reward.

Before one decides on purchasing an investment (I'm going to stick to real estate investments because that is where I have some knowledge), one must complete significant due diligence. This includes risk, return, liquidity, management, and tax analysis. I use a great software program called Investit (www.investit.ca) which allows me to do in-depth financial analysis based on numerous "what-if" scenarios. Using software programs such as Investit allows me to compare the return and the risk associated with various levels of leveraging. This is critical in analyzing leverage risk because one can see firsthand what risk/returns trade-offs one is making in taking on various levels of leverage, and hopefully arriving at the best risk/return ratio for oneself. Just as an example, let's say I want to see what my return on investment (yes there are various measures of ROI) will be at 75% leverage with a vacancy rate rising to 15% in years two and three, lowering to 5% in years four and five, with rents rising at 3% in year 3 and 4% in year five. I can do that. I can do any scenario I want. AND if you are planning on investing your money in commercial real estate, you should too.

You'll notice I said we need to find the best risk/return ratio for ourself. We are all different and we can all tolerate different levels of risk. I can not tell you what ratio of leverage is best for you, only you can do that. There is no "right" amount of leverage, we each must find our own level of comfort. Have you ever lost money before? How did you handle it? There is a clue to your level.

Okay, and so finally, what do I recommend in today's market for leverage? I certainly recommend leverage at any point in time. Buying straight cash is a waste of time and money. In today's market I recommend keeping your leverage well below your tolerance point. Depending on the type of investment you have, I recommend you keep a significant cash resource available to you for negative cash flows. The world economy (see my previous blogs and any recent economic news item for that matter) is very much in turmoil, and I would place more emphasis than usual on being able to keep my investments for the foreseeable future. All we have to do is look at the American experience; many property owners are struggling severely just to be able to hang on to their properties and their personal credit rating. Yes, we are certainly in the tiger's den at the moment. Be careful, but go get some kittens.