Am I over leveraged?

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Am I over leveraged?

Michael Simolke
Rental Property Investor · Asheville, NC · Member since 2017 · 44 posts · 49 votes
Hey guys and gals. I’m 24 just started investing in RE a year ago. I have 4 properties. 1 is break even 1 has $300 cash flow 1 has $500 cash flow 1 is going through eviction I have about $330,000 in debt. And $18k in cash reserves. Am I over leveraged? What steps should I take now considering the current market conditions.. thanks everybody!
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Al Williamson
Rental Property Investor · Sacramento, CA · Member since 2011 · 2k+ posts · 1k+ votes
8y

Hi Michael,

So there's negatively, neutrally, and positively leveraged debt.

You don't want negatively leveraged debt because you need to bring money to the table each month to pay for the bill.

Positively leveraged debt throws off cash each month. This is great if you have the right amount in your mix.

So, to answer your question, I'd like you to classify your debt and consider getting read of the negatively leveraged stuff.

Hope that helps.

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  • Al Williamson
    Rental Property Investor · Sacramento, CA · Member since 2011 · 2k+ posts · 1k+ votes
    8y

    Hi Michael,

    So there's negatively, neutrally, and positively leveraged debt.

    You don't want negatively leveraged debt because you need to bring money to the table each month to pay for the bill.

    Positively leveraged debt throws off cash each month. This is great if you have the right amount in your mix.

    So, to answer your question, I'd like you to classify your debt and consider getting read of the negatively leveraged stuff.

    Hope that helps.

    2Reply
  • Jim Pellerin
    Real Estate Consultant · USA · Member since 2014 · 1k+ posts · 751 votes
    8y

    What's the total value of your properties and your total mortgage amount. Leverage is based on loan to value. You provided cash flow numbers. 

    1Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    What is your Debt to Income ratio?

    Everything described seems to be OK until I see that eviction (from tenant ?).  Your $18K saving will not last long. Is your FICO above 700?

    Not sure about your profession/income steadiness.  I would suggest you not having to borrow as it seems to be on the boarder line. 

    0Reply
  • Todd BlytonPro Member
    Rental Property Investor · Frederic, WI · Member since 2016 · 22 posts · 12 votes
    8y
    @Michael Simolke You would be overly leveraged whenever your servicing of the debt exceeds your cash coming in to service the debt. As long as you have positive cash flow on debt that is tax advantaged you are not over leveraged. If you are worried about being over leveraged first look at your personal debts that are not producing income for you. Remember that when you are increasing equity in a property you are only reducing the risk of the lender.
    1Reply
  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
    8y
    Originally posted by @Michael Simolke:
    Hey guys and gals. I’m 24 just started investing in RE a year ago.

    I have 4 properties.

    1 is break even 1 has $300 cash flow 1 has $500 cash flow 1 is going through eviction

    I have about $330,000 in debt. And $18k in cash reserves. Am I over leveraged? What steps should I take now considering the current market conditions.. thanks everybody!

     This question can't be answered easily. The problem is that each individual is different in terms of how comfortable they feel with leverage.

    Podcast Guest on Show #21
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  • Michael Simolke
    OP
    Rental Property Investor · Asheville, NC · Member since 2017 · 44 posts · 49 votes
    8y

    Thanks everyone for the replies! 

    0Reply
  • John Acheson
    Renter · Las Vegas, NV · Member since 2018 · 278 posts · 71 votes
    8y

    Michael, that's a scary Forum Title at the beginning of a downturn.

    Australia, China, Canada, California, New York have already dropped

    and the big banks have recently laid of 100s of high paying mortgage jobs.

    With interest rates over 5% for most average SFH buyers, are you leveraged

    fixed at 3-4%? Can you handle a vacancy at the same time value drop 25-40%?

    If not, generate cash and build credit profiles for free i.e. 800 FICOs and 80 PAYDEX LLCs

    because when you need to raise money, the more options the better.

    If you need any advice on building credit effectively on the cheap,

    feel free to reach out :)

    This is my opinion and I'm not licensed,

    John Acheson, MBA

    0Reply
  • Nathan Frost
    Rental Property Investor · Wichita Falls, TX · Member since 2018 · 353 posts · 80 votes
    2y
    Quote from @Al Williamson:

    Hi Michael,

    So there's negatively, neutrally, and positively leveraged debt.

    You don't want negatively leveraged debt because you need to bring money to the table each month to pay for the bill.

    Positively leveraged debt throws off cash each month. This is great if you have the right amount in your mix.

    So, to answer your question, I'd like you to classify your debt and consider getting read of the negatively leveraged stuff.

    Hope that helps.


     Could you take a look at my portfolio and help me out?

    This is my exact situation. Would anyone be willing to look at my portfolio and give me solid advice? I can withstand the next 5-6 months but if I have any vacancies or repairs I am going to hurt a little. I really think I should sell 2-4 properties but really would like some solid advice on smart action steps I could take now to set myself up in more sustainable position. It would be great to sell just 3 and go get an STR or something that cash flows nicely but it would have to be a solid deal or else it could put be back into a position where I can't withstand the monthly mortgage payments. Please reach out as I could use the advice/tips.

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