Question about risk and leverage
I have been reading a lot on BP! Thanks everyone for such a great community.
One question I have is:
I have heard people talk about how often in a booming market, you'll have tons of over-leveraged investors who, when there is a big crash, they go bankrupt.
How do you safeguard against this kind of thing? By taking on fixed-rate mortgages only? If the market crashes and interest rates rise, but you have a fixed-rate mortgage, does that safeguard you?
I have also heard people mention that a market crash will not affect rentals that much -- in fact, it could improve rentals because there is more demand for rentals after all the foreclosures happen. So if my main strategy is buy-and-hold, is this idea of being over-leveraged something I don't have to worry as much about? Also, I am lucky to be partnering with my parents, so I do have (for now) plenty of cash reserves in case something goes wrong. That's just another component that might help people answer my question personally.
I just don't understand how, if you have a fixed-rate mortgage, and a market crash doesn't affect your rental cash-flow, would you go bankrupt? And who are the types of investors that end up "losing" when the local RE market crashes?
Thanks!
Dorian