leverage

14 Replies

Can anyone explain the pros and cons to using my first rental property as leverage to purchase another rental property, 

If you talk to someone like Ben L he might tell you that leveraging less than 140% is foolish:) Leverage can be a great way to increase holdings and build wealth. That is definitely a pro. There are other concerns. Your income. Your DTI if seeking conventional financing. Your cash reserves, and more. Remember, the guys that got taken out in '07 were the ones that were leveraged to the maximum. Leverage is a great tool if used wisely.

@Brandon Crumpton

 - Great question and @John Thedford summed it up nicely.

Yes, it's a double edged sword that enables you to take massive leaps forward and risks or can be utilized to the point where you overextend yourself and then being unable to sleep well at nights.

Use leverage wisely and you will benefit from it's advantages positively.

Originally posted by @Linval T. :

@Brandon Crumpton

 - Great question and @John Thedford summed it up nicely.

Yes, it's a double edged sword that enables you to take massive leaps forward and risks or can be utilized to the point where you overextend yourself and then being unable to sleep well at nights.

Use leverage wisely and you will benefit from it's advantages positively.

Thanks! From the way you guys are saying it. It seems it's just gamble. So basically do you think if my pocket cash after I collect rents from my first building is good. Then leverage is good that way if something happens I'll have enough of my own cash to cover it? 

@Brandon Crumpton To me it's no different than any other risk assessment.   Identify the probability of a risk (such as vacancy) occurring and the mitigation steps required (cash reserves) to cover yourself.   As long as you don't over leverage yourself by keeping not enough cash on hand then it's a great way to build wealth.  

Personally I rather buy 3 100k houses by putting 30k down on each rather than buy 1 house at 100k.  Triple the rent for the same money and it's unlikely you'll suffer some catastrophe on all your properties at the same time.  

Originally posted by @Dominic Metzger :

@Brandon Crumpton To me it's no different than any other risk assessment.   Identify the probability of a risk (such as vacancy) occurring and the mitigation steps required (cash reserves) to cover yourself.   As long as you don't over leverage yourself by keeping not enough cash on hand then it's a great way to build wealth.  

Personally I rather buy 3 100k houses by putting 30k down on each rather than buy 1 house at 100k.  Triple the rent for the same money and it's unlikely you'll suffer some catastrophe on all your properties at the same time.  

Thanks! Well unfortunately real estate is expensive here in the California. So there isn't any 100k houses around  here.  But I have a triplex in which I live in one and rent the other 2. But I want to expand and buy another property. So I'm trying to get as much advice and wisdom from successful investors as possible. But a lot are saying leverage is good long as your saving that cash for a rainy day.  So I'm just trying to figure out should I use my own assets  (cash) to buy my next or use my first as leverage.  Do you know whether not I would be effected tax wise by using leverage? By using leverage am I affected different? 

Hi Brandon, 

How is your quest going? I also live in California and have interest in leveraging my first property. Have you been able to find anything helpful here that you might share with me? I am located in the SF Bay Area.

-V

I had a similar question regarding leverage...I have 5 properties, 2 of which are paid for and 3 are financed.  finance amounts are roughly 27K, 38K and 124K.  I am at 100% occupancy and have positive cash flow for all of them.  What would my next step be to leverage "slightly?"  Or am I over leveraged currently?  Is there a rule of thumb in terms of leverage?  Also, what is considered decent positive cash flow for a single family home?  Is turning $150/mo profit worth it or $200 or $400?  Whats a realistic goal?  Any other thoughts?  Thanks in Advance!!!

@Martin Nowak I had a similar question(actually posted it in the pro area and no one responded to me). So I figured it out myself. It's risk:reward when it comes to leverage. Yeah you can leverage like crazy but you may go bust that way. There's no preset answer. There's basic guidelines like have 6 months of mortgage payments and a capex account for a rainy day. I'm more conservative and would rather own the home so there's no worries. Cash flow depends on what you want there's the 2% rule and all that. Obviously the homes you own should cash flow more than the ones you have mortgaged

Leveraging will help you grow your portfolio the fastest.

You can buy a property, and build equity in it, and then using a HELOC or equity loan you can take the equity out of the property and acquire a second one. Then do the same thing on the second.

If you completely pay off a property, you won't have any debt. However you also will be letting all of that built up equity go to waste. When instead you could own 3-4 properties that all cash flow.

Rich Dad Poor Dad speaks on good debt vs bad debt. I recommend you read that book and also study good debt.

@Rosston Smith great recommendation on rich dad poor dad, a must read. To original poster as far as leveraging there was a great article just written in the BP blog on it. It's a double edge sword of growth vs safety(risk:reward) and everyone is different when it comes to tolerances. There's a few things in investing (this is one of them) that other people can't answer for you because we aren't you.

Leveraging saves your cash assets, but becomes a disincentive to the next banker you talk to.

As long as you're dealing with SFRs (and 2-4s) with conventional financing, the CONS kill your next deal as your DTI goes through the roof.

Move into Commercial Financing (portfolio loans) and 5+ units and your DTI will no longer be a deficit to you as the properties themselves are self-supporting - - that's what the DSCR number proves to the lender.

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