What exactly does it mean to be over leveraged and how should you deal with it?

2 Replies

To my understanding being overleveraged is having more debt than you can payoff. This, however, cannot be right sense simply getting one mortgage would make the vast majority of people overleveraged. Therefore it must be that being over leveraged involves more than just debt. I just don’t know what it is.Would buying a new rental/starting a new rehab positively or negatively affect your leverage?

I have no problem with taking risks, but i like to do what i can to minimize the damage from my eventual screw ups.

Depending on the situation it can mean one of 2 things.

Owning more on a property than its worth.

Owning so much on a property it wont cash flow.

I guess technically since (in this area) it takes about 7% to sell a property, owning close to or more than 93% on a property could be considered over-leveraged.

Originally posted by @Judah Hoover :

Depending on the situation it can mean one of 2 things.

Owning more on a property than its worth.

Owning so much on a property it wont cash flow.

I guess technically since (in this area) it takes about 7% to sell a property, owning close to or more than 93% on a property could be considered over-leveraged.

 Actually, the OP had it.  Being over-leveraged is having take on too much debt (more than can be serviced) .. regardless if you are talking real estate or any other business.

When a property does not produce enough net revenue to fully service debt we typically refer to the situation as negative gearing.   This may be an acceptable short term situation if the property is experiencing strong appreciation - things will become profitable when the property is sold.

If the balance of the debt exceeds the market value of the underlying property, you have a situation of negative equity.  In the U.S.A. you frequently refer to the property as being underwater and the note/mortgage as being upside down

While both of these could occur in conjunction with being over-leveraged, neither on its own is sufficient to conclude the borrower is over-leveraged.

Updated about 3 years ago

If only I could type. That opening line should read "... having taken on too much debt ..."

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