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Jimmy Humphrey
  • Underwriter
  • Charlotte, NC
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Over Leveraged?

Jimmy Humphrey
  • Underwriter
  • Charlotte, NC
Posted Sep 9 2015, 18:30

Hi,

Listening to some of the podcasts and reading the blog, I keep feeling this inner red flag that keeps popping up in me.  I get the feeling that a lot of folks are advocating being over leveraged and taking on an ungodly level of debt in order to chase what amounts to a mere $100-200 a month in cash flow for each rental property in their portfolio. And that people are cashing out equity in their home to fund their next project, then using the equity in their rental property to fund the next deal and so forth. 

If you have ten properties with a total of 700k of debt and $2,000 of monthly cash flow, there doesn't seem to be a lot between you and a financial disaster. And working on the foreclosure side of a bank, I can't tell you how many folks I've seen have one or two rental properties fail, which created a domino effect that completely wiped them out.  It also doesn't help I've read a lot of Dave Ramsey type stuff and have a strong belief about living frugally and simply.  I've seen a lot of ugly.

To me it almost seems like if one wants to expose themselves to Real Estate investing, it'd be more prudent to invest in a REIT stock with a good dividend (like "O", which has a 5.3% yield). There seems to be less risk involved, and more upside potential. I suppose if one wanted to, they could invest with some margin in order to take on a bit of leverage.

So, what are y'all's thoughts on the risk one is taking with leverage and cash flow? How do you safe guard risk?

Jimmy

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