Leverage

3 Replies

What is a good percentage to use as leverage when buying property. I have spoken with proven investors who prefer 60% while others go for the minimum of 20%. Any thoughts

@Mike O'Connor , "minimum of 20%"? But that also includes those who prefer 60% (because they mean "anything UP TO 60%"), so it's not necessarily two groups you are referring to. 

60% might be considered quite conservative by OTHER investors who you haven't mentioned, but, they are likely to be the first who have to run for the hills once the merry-go-round stops again!

The MAIN point to make is: how GOOD are the deals that are being leveraged!?

 @Mike O'Connor

Leverage is a very tricky topic, it really depends on your exit strategy and how good the deal itself is. If you are Fix and Flipping and can profit with 100% leverage (and have a lender that will go there) then go for it!... Personally I would like to be able to run 75/25 or 80/20 on my deals for fix and flip, the downside is having the 20-25% resources to run it... On buy and hold for rentals I would say that it is, in part, going to depend on your lender and your rental rates. For most commercial properties lenders go to a max of 80/20 with the average I have seen being 75/25. I would also be sure to err on the side of caution when doing your math and assume a 25% vacancy to ensure you can cover the loan and operation of the building if times run thin for you, that way you will easily withstand the 10% norm (or whatever it is in your area). If you are wholesaling, use transactional funding, pay the fees and have them cover all the expenses on your close, then recover from your buyer plus your profit. Who cares if you make $1000 on a wholesale deal or if you make $10,000? Honestly I would be happier doing 10 at $1000 than 1 at $10,000.

Who knows?  It's a question of your tolerance for risk.

Leverage is a double edged sword.  It multiples your gains when the trend is in your favor and multiples your exposure when it doesn't.  The lower your risk tolerance, the lower your leverage should be.