Over Leveraged? Or smart with Cash?

[Dan Tsunekawa]

Hey BP I wanted to get some opinions on the dangers of over leveraging a property. I am formulating a strategy to acquire a number of properties in the near future using 1 or 2 REPUTABLE turnkey companies(please hold comments on turnkey model, another discussion for another day). I am planning on using conventional 80/20 conventional financing AND using a Heloc against my current home for the down payment + closing costs. I am hoping to buy maybe 5-10 properties in this fashion. If it works i’d like to get another line of credit and keep it going. My end game goal is 20 properties.

Some Facts

• I have a steady job in software that i am not looking to replace or supplement.
• I currently own 2 cash-flowing properties
• I do not need any cash flow today to live on. Any cash returns are put to work expanding my portfolio
• These properties are to set myself up for retirement (I’m 28)
• My heloc terms include P&I on a 30yr schedule. It is not interest only
• Turnkey properties are generally bought close to market value, so no "built-in" equity 
• I am setting aside about $30,000 cash annually for investing

I am in acquisition mode right now, looking for ways to build my portfolio using as little cash as possible. Even tho i am setting aside cash for investing, i am looking to use that for reserves, and stock piling it in for when the market turns back down. I know there are risks associated with being over leveraged. Below i have laid out the ones i can think of and how i am planning on mitigating them.

Up-Keep

• Only use vetted turnkey companies that do solid rehabs
• Save 5% gross rents for maintenance
• Save for capex even tho so many companies tell you it’s not necessary (WHY?! No wait, don’t answer that, i’ll start another thread)

Vacancy

• Buy in markets with strong fundamentals (pop growth, job growth, job diversity)

• Buy in good quality B class neighborhoods that would maintain renters even in a downturn
• Save 5% gross rents for vacancy
• Save for inevitable lease up fees

Rent Prices Drop

• My numbers predict i could stay in the black even with a 10% drop in rental prices (see example below)

Other

• At time of purchase i set aside 6 months of gross rent in cash, for reserves

Sample Property

This is a sample property is actually more like a higher c class, but i you could move the numbers up higher and see the same thing with a B class SFR

Purchase Price: $60,000

Closing costs: $4,000

Rent $900

Vacancy ~ $45(5%)

Maintenance ~ $45(5%)

Capex ~ $125

Op expenses(tax, insurance, lease up, mgmt) ~ $162

NOI ~ $522

Mortgage: $261

Heloc: $68(at current rate) - $160(at highest rate)

Cash flow: $193(at current rate) - $101(at highest rate)

I'm a little scared to ask this, but better burned on BP then in real life, so here we go.

What am i missing or what did i not think of?