Over Leveraged?

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Over Leveraged?

Jimmy Humphrey
Underwriter · Charlotte, NC · Member since 2015 · 30 posts · 15 votes

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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Michael Worley
Investor · Carrollton, TX · Member since 2015 · 109 posts · 76 votes
11y
Originally posted by @Jimmy Humphrey:

@Elizabeth Colegrove Part of my concern about this entire being heavily leveraged in order to generate an income is that you have a negative net worth because of your leverage. You aren't really generating wealth, you are generating cash flow. And there is a fundamental difference between the two, and part of me worries that a lot of the common REI techniques pitched on here operate without any concern about net worth. It doesn't seem anybody ever ends up truly owning anything lock, stock, and barrel.

And that's not to pass judgment on you or others who employ leveraged techniques to investing in real estate. It's just a thing I'm tossing out there for consideration. 

How exactly do you have a negative net worth if you borrow 80% of the value of a property? You have an asset worth say, 150k and a liability worth 120k. That's 30k of positive equity. Now, how did you come up with the 20%, was it cash, market appreciation, etc.?

REI is all about adding to your balance sheet. To my knowledge, no one is allowing you to borrow over 100% of the value of a property at this time.

Your statement about not added to net worth, only added to cash flow doesn't make any sense.

By definition, if you pay full price for something you've added no net worth. You pay $100 for something worth $100, all you have done is move money from the cash/equivalents portion of your balance sheet to the 'other asset' category. The way you affect your net worth in this instance doesn't matter (i.e. you borrow $80 and spend $20 in cash or you spend $100 in cash to buy a $100 asset has a net zero effect on your net worth).

What matters is the price you pay versus the 'value'. 'Value' is not an exact science either, but the premise behind REI is that in general there is a long track record of RE growing in value.

Leverage does not adversely affect your net worth or cash flow. In general, it positively affects it. For example if the CAP rate of a project is 7% and the interest rate paid on the borrowed funds is <7% the greater the leverage the higher the Cash on Cash return.

As for owning something lock stock and barrel, why would you want to?

Let's say I have two options, Own a $200k house outright with $20,000 in the bank, or Owe $100,000 on a $200k house with $120,000 in the bank. Which is better position for me? Well, you can't pay bills with equity, so if I had a medical bill for $30,000 I'd be better off with leverage. If I have to pay for a child's college tuition bill of $50,000 I can't do that with the equity, I'd have to convert that equity to cash. You get the idea.

Having lots of money tied up in illiquid assets is a recipe for failure if I don't have the liquid assets to overcome a financial hardship.

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y
    Originally posted by @Joshua Woolls:

    Are you telling me that every property in your area sells at the exact same CAP rate? If you are, you are wrong.

    No I am saying you will NOT see 5% difference for similar properties in the same market.  Perhaps .5%.

    0Reply
  • Joshua Woolls
    Investor · Grosse Pointe Park, MI · Member since 2015 · 164 posts · 64 votes
    11y

    The amount is not important. I was just using two arbitrary numbers for an example. If you are looking at a 5% and 5.5%, the higher CAP rate is better. And if we are looking at two different similar SFR in my market, I can absolutely find properties that have a 15% CAP rate vs. a 10% CAP rate. All... Day...Long.

    Homes that rent for 1100 a month. 800 a month after expenses. Very, Very similar homes will range from 65k to 90k.

    I understand CAP rates aren't really great for SFR, but I use them every day when I am evaluating a property.

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y
    Originally posted by @Joshua Woolls:

    The amount is not important. I was just using two arbitrary numbers for an example. If you are looking at a 5% and 5.5%, the higher CAP rate is better. And if we are looking at two different similar SFR in my market, I can absolutely find properties that have a 15% CAP rate vs. a 10% CAP rate. All... Day...Long.

    Homes that rent for 1100 a month. 800 a month after expenses. Very, Very similar homes will range from 65k to 90k.

    I understand CAP rates aren't really great for SFR, but I use them every day when I am evaluating a property.

    AGAIN if the 5.5% is better why is the NOI worth LESS?

    Cap rates on SFR? LOL Please provide two comps that you were not involved in the sale AND show me HOW you use them every day in evaluating a property.

    Take your time.  Friday nite and I'm gonna enjoy it.

    0Reply
  • Joshua Woolls
    Investor · Grosse Pointe Park, MI · Member since 2015 · 164 posts · 64 votes
    11y

    I am not sure what your issue is. This discussion was about why it is better to buy a higher CAP rate than a lower one(it is) and you have turned it into "all properties in the same market have the same cap rate"(they don't).

    As for using CAP rate, when I am evaluating properties, I have a spreadsheet. I plug in. Cost and expenses and it shoots out a CAP rate. It's not hard. If I see a high CAP rate, I start to look closer at the property and ask questions. It's not hard. Are these perfect? Nope, but I know the areas I buy in and they are pretty damn close. Are there other things I consider? Hell yeah.

    There is no reason why you cannot use a CAP rate in SFR. Is it the ideal tool? No. I use many tools and that is just one, but it is quick and easy and starts pointing me in the wright direction.

    Example:

    26420 Kenneth Redford MI. 48239. 

    I own it. Bought it a few months ago. I know the area and knew it would rent for $1150(it did). It was for sale for 60k. So I ran the numbers.

    $54 Month Insurance, $150 Tax, $100 Property management (paid to my property management company), $50 Misc. This leave me with $800 month income. $9600 a year. $9600/$60000. This gives me a 16% CAP rate. I said to myself "Hmmm....Not too shabby, I think I will take a closer look". I did, I liked it, so I bought it.

    And tonight...just like most other nights, I am doing the same thing. Find a property. Do a quick Assessment. Run the numbers. Cross it off the list for further review, or add it to my drive by list. If the drive by looks good, I call my realtor and we take a look.

    0Reply
  • Steve B.
    Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    11y
    No one is going to admit they are over leveraged until the market goes down and they go bankrupt. At that point a significant portion of the BP community will disappear quitly into the night. In related news Joe's Crabshack will lose a lot of their lunch crowd.
    5Reply
  • Zach Adams
    Investor · Vista, CA · Member since 2015 · 163 posts · 58 votes
    11y
    Originally posted by @Jimmy Humphrey:

    Thanks for the insights. It really looks like it's not as dangerous as I thought so long as you really look hard for a great deal. 

    I picked the $100-200 a month figure from the guy on the Podcast who says that's what he looks to cash flow per door.  Honestly, I don't think I would feel safe doing anything less than $400 a month. At that point it seems better to just invest in the stock market and using something like ticker symbol O which pays a 5.3%+ dividend.

     You seem to really the ticker "O"....

    0Reply
  • Zach Adams
    Investor · Vista, CA · Member since 2015 · 163 posts · 58 votes
    11y
    Originally posted by @Elizabeth Colegrove:

    I have 1.3 million of debt for $2,000 and am a happy little clam :)

    Just Saying!!

    I think everyone has their own style and business model. The key is to stay true to your business model/plan and not get caught up with getting rich fast. 

    We make between $180-$450 per rental. We intentionally buy higher end homes that appeal to professionals. These are newer homes, at 100% to 75% finance in great up and coming areas.

     Love it Elizabeth!  I have a similar strategy myself.

    thanks!

    0Reply
  • Zach Adams
    Investor · Vista, CA · Member since 2015 · 163 posts · 58 votes
    11y
    Originally posted by @Jimmy Humphrey:

    For everybody might I suggest reading the book "The Millionaire Next Door". The average millionaire is debt free and averages $90k a year in income without being leveraged.  

     I liked that book, although I think it was more a disposition on what the wealthy really looks like in the US.  The author also spent a lot time discussing their families and the confusion their children have about wealth.  

    From my recollection, the examples were mostly good wage earners that saved a high percentage (frugality stressed) of their pay and slowly and steadily invested in equities over the course of their lives, maintaining the same standard of living over the course of their lives.

    I enjoyed the book and learned a lot about how the wealthy plan their estates and allocate their wealth, but it was not a good "how to" book for financial independence prior to 65.  I don't think RE was mentioned at all...

    Zach 

    0Reply
  • Jimmy Humphrey
    OP
    Underwriter · Charlotte, NC · Member since 2015 · 30 posts · 15 votes
    11y

    @Steve B. there does seem to be a bit of self assurance about how well one knows the market and employs the right technique. I'm not saying everybody is wrong and that there isn't some really good insight out there. But to me, if you can't point to a specific numerical level and say that such a level is dangerously highly and inherently risky, then I can't help but worry for that person. I've watched quite a few podcasts so far (not all mind you), and so far I've not seen any word of caution about what is considered too much debt. And reading the forum, it seems like most everybody is good with taking on as much debt and being as highly leveraged as possible. The sky seems to be the limit.

    The only hint of a debt ceiling limit I've seen implied in discussions/podcasts is the limits that various banks decide to put on an individual. Such is a huge red flag to me. It's like when a bank requires a co-signer for you to get an auto loan. It means the bank sees as as over leveraged and a huge risk, which is why they require a co-signer. And you should see such as problematic too!  But instead off seeing this as a red flag, most people seem to think of it as just another hurdle to jump. I am bothered by that.

    After all, a bank is in the business to make money, and the primary means of doing so is by lending you their money. But if they cut you off after 4-10 deals, they are doing so not for some strictly artificial reason, but because they see you as being in danger, and too risky to loan money too.

    It would sound to me that if a bank cuts you off after a certain amount, then instead of going to loan sharks (read: "hard money" lenders), you should look at forming a legitimate corporation that takes out commercial loans and runs more like a legitimate financial institution.

    Just some thoughts...

    0Reply
  • Jimmy Humphrey
    OP
    Underwriter · Charlotte, NC · Member since 2015 · 30 posts · 15 votes
    11y
    Originally posted by @Zach Adams:
    Originally posted by @Jimmy Humphrey:

    Thanks for the insights. It really looks like it's not as dangerous as I thought so long as you really look hard for a great deal. 

    I picked the $100-200 a month figure from the guy on the Podcast who says that's what he looks to cash flow per door.  Honestly, I don't think I would feel safe doing anything less than $400 a month. At that point it seems better to just invest in the stock market and using something like ticker symbol O which pays a 5.3%+ dividend.

     You seem to really the ticker "O"....

    I just picked it because it's a pretty popular well performing REIT. I have no holdings in it... yet

    0Reply
  • Jimmy Humphrey
    OP
    Underwriter · Charlotte, NC · Member since 2015 · 30 posts · 15 votes
    11y
    Originally posted by @Zach Adams:
    Originally posted by @Jimmy Humphrey:

    For everybody might I suggest reading the book "The Millionaire Next Door". The average millionaire is debt free and averages $90k a year in income without being leveraged.  

     I liked that book, although I think it was more a disposition on what the wealthy really looks like in the US.  The author also spent a lot time discussing their families and the confusion their children have about wealth.  

    From my recollection, the examples were mostly good wage earners that saved a high percentage (frugality stressed) of their pay and slowly and steadily invested in equities over the course of their lives, maintaining the same standard of living over the course of their lives.

    I enjoyed the book and learned a lot about how the wealthy plan their estates and allocate their wealth, but it was not a good "how to" book for financial independence prior to 65.  I don't think RE was mentioned at all...

    Zach 

    It was a pretty long book and it's been a few years since I read it, but the tons of examples given were meant to be somewhat educational and serve something as a paradigm. It's like Dave Ramsey says, he learned about how to create and manage wealth by learning from those who had done both. 

    0Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    11y

    @Jimmy Humphrey

    The 10 mortgage rule is a FNMA rule, thank the Feds in DC for that one.  Prior to that regulation FNMA didn't care how many mortgages you had only that you qualified for each.  How refreshing is that?

    The rule is a stupid rule imho.  If you are a millionaire and have 10 mortgages for $10,000 each, you owe $100,000 and are shut out by Fannie.  But the same person with the same income, same credit score has one mortgage for $1,000,000 and FNMA welcomes them with open arms.  You figure it out.

    3Reply
  • Jimmy Humphrey
    OP
    Underwriter · Charlotte, NC · Member since 2015 · 30 posts · 15 votes
    11y
    Originally posted by @David Krulac:

    @Jimmy Humphrey

    The 10 mortgage rule is a FNMA rule, thank the Feds in DC for that one.  Prior to that regulation FNMA didn't care how many mortgages you had only that you qualified for each.  How refreshing is that?

    The rule is a stupid rule imho.  If you are a millionaire and have 10 mortgages for $10,000 each, you owe $100,000 and are shut out by Fannie.  But the same person with the same income, same credit score has one mortgage for $1,000,000 and FNMA welcomes them with open arms.  You figure it out.

    As an underwriter for the GSE's for a living, trust me I understand what you are saying about wrapping ones head around some of the guidelines when trying to understand how they are layering their risk. Sometimes it definitely seems artificial, where a 2 bit politician clearly wrote specific guidelines. But in the same breath, having underwritten what must be thousands of deals now and learning to think like and underwriter, some of it eventually starts to make sense.  

    0Reply
  • Thomas Fucci
    Oxnard, CA · Member since 2015 · 43 posts · 8 votes
    11y

    Prior to 2007 there were "Gurus" preaching the idea that it was all right to lose a hundred a month net because the property would be appreciating an average of 5.5% per year.  So people bought and ate the losses till 2007/2008 came and punched them square in the face and they suddenly realized how little they knew about the real estate business and the charlatans at play in a field of the naive.  

    2Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    11y

    @Jimmy Humphrey

    One other thing we did was put some property in wife's name, so you can get 20 FNMAs

    2Reply
  • Michael Henry
    Real Estate Consultant · Brookfield, WI · Member since 2014 · 873 posts · 350 votes
    11y

    How do you safe guard risk? Buy low and Sell high.  Many of the good deals are few, and far between, but many investors get caught up in the hype and start over paying for properties because that want a large portfolio so that he/she can say "I have a large real estate portfolio".  Building a sound real estate portfolio takes time...

    3Reply
  • Joshua Woolls
    Investor · Grosse Pointe Park, MI · Member since 2015 · 164 posts · 64 votes
    11y
    Originally posted by @Jimmy Humphrey:

    @Steve B. there does seem to be a bit of self assurance about how well one knows the market and employs the right technique. I'm not saying everybody is wrong and that there isn't some really good insight out there. But to me, if you can't point to a specific numerical level and say that such a level is dangerously highly and inherently risky, then I can't help but worry for that person. I've watched quite a few podcasts so far (not all mind you), and so far I've not seen any word of caution about what is considered too much debt. And reading the forum, it seems like most everybody is good with taking on as much debt and being as highly leveraged as possible. The sky seems to be the limit.

    The only hint of a debt ceiling limit I've seen implied in discussions/podcasts is the limits that various banks decide to put on an individual. Such is a huge red flag to me. It's like when a bank requires a co-signer for you to get an auto loan. It means the bank sees as as over leveraged and a huge risk, which is why they require a co-signer. And you should see such as problematic too!  But instead off seeing this as a red flag, most people seem to think of it as just another hurdle to jump. I am bothered by that.

    After all, a bank is in the business to make money, and the primary means of doing so is by lending you their money. But if they cut you off after 4-10 deals, they are doing so not for some strictly artificial reason, but because they see you as being in danger, and too risky to loan money too.

    It would sound to me that if a bank cuts you off after a certain amount, then instead of going to loan sharks (read: "hard money" lenders), you should look at forming a legitimate corporation that takes out commercial loans and runs more like a legitimate financial institution.

    Just some thoughts...

    I think that risk goes up exponentially the closer we get to 100% leveraged. I also think that most people understand it. But, as we get closer to 100% leveraged, that risk starts getting shifted more onto the bank and away from the investor. Some people are OK with this.... I am not. Personally, believe other people's money should be protected before my money. 

    As for debt ceilings, I think the reason that it doesn't get discussed much is because it falls right around that 75-80% mark, which just so happens to fall right in line with where the banks cut us off. Coincidence? I think not. Are there people that would over leverage if they could? Absolutely, because the closer and closer that we get to that 100%, the more the risk gets shifted away from the borrower and more to the bank.

    When it comes to hard money loans, those should not be being used for buy and hold investments(in my opinion). Hard money is for different types of projects/situations. Sometimes hard money can be used like cash for acquisition. This can have distinct advantages. And I would not call a hard money lender a Loan Shark, there is a time and a place for what they do. 

    As for commercial loans for real estate.... Good luck. It can be done, but it's not easy. I just spent several months and visited about 20 banks to get some loans on my rental property in the form of a portfolio loan. 5 properties with 100% equity. I wanted to borrow about 200k(50%) of the value for an upcoming tax auction. My personal debt is pretty low, and I still had a very difficult time finding a bank that would work with me. 

    I am not trying to say you are wrong on your thoughts. I agree with a lot of what you are saying. I am just playing the devil's advocate.

    2Reply
  • Darrell Shepherd
    Rehabber · Smyrna, GA · Member since 2013 · 864 posts · 510 votes
    11y
    Originally posted by @Thomas Fucci:

    Prior to 2007 there were "Gurus" preaching the idea that it was all right to lose a hundred a month net because the property would be appreciating an average of 5.5% per year.  So people bought and ate the losses till 2007/2008 came and punched them square in the face and they suddenly realized how little they knew about the real estate business and the charlatans at play in a field of the naive.  

    Yup. I more or less did this. Basically was trained that the play was to break even and make your money on the appreciation and loan pay down. Worked fine when my rehab business was covering things. Total disaster when the market tanked and I couldn't sell anything. And that description is very accurate, I got punched in the face and suddenly realized how little I knew about the real estate business. I had done a ton of sub2 to L/O's too and those came back to bite me in the *** as well.

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y
    Originally posted by @Joshua Woolls:
    Originally posted by @Jimmy Humphrey:

    @Steve B. there does seem to be a bit of self assurance about how well one knows the market and employs the right technique. I'm not saying everybody is wrong and that there isn't some really good insight out there. But to me, if you can't point to a specific numerical level and say that such a level is dangerously highly and inherently risky, then I can't help but worry for that person. I've watched quite a few podcasts so far (not all mind you), and so far I've not seen any word of caution about what is considered too much debt. And reading the forum, it seems like most everybody is good with taking on as much debt and being as highly leveraged as possible. The sky seems to be the limit.

    The only hint of a debt ceiling limit I've seen implied in discussions/podcasts is the limits that various banks decide to put on an individual. Such is a huge red flag to me. It's like when a bank requires a co-signer for you to get an auto loan. It means the bank sees as as over leveraged and a huge risk, which is why they require a co-signer. And you should see such as problematic too!  But instead off seeing this as a red flag, most people seem to think of it as just another hurdle to jump. I am bothered by that.

    After all, a bank is in the business to make money, and the primary means of doing so is by lending you their money. But if they cut you off after 4-10 deals, they are doing so not for some strictly artificial reason, but because they see you as being in danger, and too risky to loan money too.

    It would sound to me that if a bank cuts you off after a certain amount, then instead of going to loan sharks (read: "hard money" lenders), you should look at forming a legitimate corporation that takes out commercial loans and runs more like a legitimate financial institution.

    Just some thoughts...

    I think that risk goes up exponentially the closer we get to 100% leveraged. I also think that most people understand it. But, as we get closer to 100% leveraged, that risk starts getting shifted more onto the bank and away from the investor. Some people are OK with this.... I am not. Personally, believe other people's money should be protected before my money. 

    As for debt ceilings, I think the reason that it doesn't get discussed much is because it falls right around that 75-80% mark, which just so happens to fall right in line with where the banks cut us off. Coincidence? I think not. Are there people that would over leverage if they could? Absolutely, because the closer and closer that we get to that 100%, the more the risk gets shifted away from the borrower and more to the bank.

    When it comes to hard money loans, those should not be being used for buy and hold investments(in my opinion). Hard money is for different types of projects/situations. Sometimes hard money can be used like cash for acquisition. This can have distinct advantages. And I would not call a hard money lender a Loan Shark, there is a time and a place for what they do. 

    As for commercial loans for real estate.... Good luck. It can be done, but it's not easy. I just spent several months and visited about 20 banks to get some loans on my rental property in the form of a portfolio loan. 5 properties with 100% equity. I wanted to borrow about 200k(50%) of the value for an upcoming tax auction. My personal debt is pretty low, and I still had a very difficult time finding a bank that would work with me. 

    I am not trying to say you are wrong on your thoughts. I agree with a lot of what you are saying. I am just playing the devil's advocate.

     I've been right with you for the most part...and this could be the most important thing you've said, 

    "I think that risk goes up exponentially the closer we get to 100% leveraged. I also think that most people understand it. But, as we get closer to 100% leveraged, that risk starts getting shifted more onto the bank and away from the investor."

    There's a reason why the Banks won't lend out 100% to anyone...it's because the risk "is" the person getting the loan, and the person taking the risk is the one lending the cash (or virtual cash, which is what the banks do).

    When the economy turns, and property values go down, unless the REI treats their investments like a stock, panics, and sells, this downturn should have little impact on them. All that is impacted is their equity...which they are not using. Their cash flow keeps coming. If I had to sell, I would be in trouble. If I don't have to sell, and just because the economy went south isn't a reason to sell, my rent may actually go up, since the supply of tenants grows.

    2Reply
  • David Oldenburg
    Lender · Granite Bay, CA · Member since 2014 · 456 posts · 454 votes
    11y

    @Jimmy Humphrey I have been in this game a very long time, and you are absolutely correct about people taking huge risk, for very small returns.  Leveraging too much is exactly what caused the housing crisis some years ago, the impact we are still feeling today.

    The problem is that people get so focused on the "rent" and fail to calculate ROI or yield. I see people in my area buying a $250,000 home to rent for $1,500. But, taxes, insurance, HOA dues etc... can be $500 per month + vacancy, maintenance and repairs. At the end of the year, you made $5,000 profit on a $250,000 investment. Ok, that's a 2% return, while taking on huge market risk.

    The argument I hear is this, "I only put down 20%, so my return on my money is actually much higher." These are stupid people!  If you buy something for $250,000, it makes no difference how much you put down, you are liable for the entire debt.  If the house drops by 40%, which has happened twice in the last 20 years in the Sacramento area where I live, then you are wiped out.  You will lose all your down payment, plus a lot more.

    I am an avid real estate investor, so I love investing, but you have to be smart :-)

    2Reply
  • Jimmy Humphrey
    OP
    Underwriter · Charlotte, NC · Member since 2015 · 30 posts · 15 votes
    11y

    Thanks for the insight @David Oldenburg  If you don't mind me asking, how much leverage do you look to employ when doing a deal?

    0Reply
  • Joshua Woolls
    Investor · Grosse Pointe Park, MI · Member since 2015 · 164 posts · 64 votes
    11y
    Originally posted by @David Oldenburg:

    @Jimmy Humphrey I have been in this game a very long time, and you are absolutely correct about people taking huge risk, for very small returns.  Leveraging too much is exactly what caused the housing crisis some years ago, the impact we are still feeling today.

    The problem is that people get so focused on the "rent" and fail to calculate ROI or yield. I see people in my area buying a $250,000 home to rent for $1,500. But, taxes, insurance, HOA dues etc... can be $500 per month + vacancy, maintenance and repairs. At the end of the year, you made $5,000 profit on a $250,000 investment. Ok, that's a 2% return, while taking on huge market risk.

    The argument I hear is this, "I only put down 20%, so my return on my money is actually much higher." These are stupid people!  If you buy something for $250,000, it makes no difference how much you put down, you are liable for the entire debt.  If the house drops by 40%, which has happened twice in the last 20 years in the Sacramento area where I live, then you are wiped out.  You will lose all your down payment, plus a lot more.

    I am an avid real estate investor, so I love investing, but you have to be smart :-)

    The problem with the investing that you are talking about is that the investors are gambling on appreciation. Appreciation can be an absolute benefit of real estate investing, but in my opinion it is not the reason to invest.

    0Reply
  • Adrian StamerPro Member
    Real Estate Investor & Agent · Richmond, VA · Member since 2013 · 319 posts · 167 votes
    11y

    Focus on cash flow, don't expect appreciation. Also know your market, personally in my market I have no issues filling vacancies which are also rare.  So for me the main challenge is finding properties and predicting rehabs and maintenance costs while periodically reviewing my numbers to make sure I am hitting my conservative targets. 

    Personally I don't mind it if the RE market dropped some, this would continue to keep rates low allowing use of more cheap money. I'm more concerned about rising rates, though I have done the numbers and have more then enough cash flow cushion to withstand max rate increases. 

    As for the stock market, until recently markets have been at all time highs and you are saying that you would prefer some minor 5% return that you have no control over? I do diversify my ira in the market, but I'm much more comfortable leveraged up into a wide variety of units so I can predict the averages better.

    If you don't leverage up and have 1 property paid out right, not only are you sacrificing a much greater return, but you also have all your eggs in one basket. Leverage brings diversity and greater predictability

    0Reply
  • Cameron Skinner
    Investor · Panama City, FL · Member since 2015 · 378 posts · 183 votes
    11y

    Thanks @Jimmy Humphrey for starting this discussion.  I think when when your young and you get started you really have little to lose,  so you can be more aggressive,  but as you build a portfolio you should not gamble everything on the next deal.  I lived through the financial crash, and I was extremely conservative and it still nearly bankrupt me.  I watched as several of my friends and colleges who were "over leveraged" get crushed and many are still dealing with the fall out.  

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  • Brie SchmidtBusiness Member
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    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    11y

    I think you are more at risk the smaller you are. If I have a couple of properties and one goes vacant I could be in a tough situation as it will probably wipe out my cash flow that month. But with 80 units I can handle a big expense or long vacancy. I would need 70% of my units to go vacant to not cover my PITI payments.

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