How leveraged are you?

Investor · Saint Paul, MN · Member since 2015 · 98 posts · 64 votes

Curious out there what people use as a general rule for how leveraged they are. How comfortable you are with debt. Do you have 401K loans? Would you cash out a Roth IRA? Do you use HELOCs off your primary?

For me I'm ok with leverage and a little risk but I'm at a point where I need to get creative/leverage myself a little more than my comfort zone or a little bit of both.

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Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

Originally posted by @Thomas S.:

The major problem with investors wanting to reduce their leverage is they are simply buying their own income/cash flow. Once a property surpasses 40% equity (or less) the property itself drifts into negative cash flow in most situations. It is no longer a asset.

Residential house & plex-only investors tend to think that all loans are fixed forever at 4% or something. Blanket statements about leverage with blinders on. I dont rush out to pay off those products, either.

But not all loans are awesome. I assure you that paid off real estate is still an asset, especially commercial property that no longer is burdened by crappy commercial terms. Adjustable, callable, balloons, rates over 5% and bothering you every year for your financials.

You can say low-levered property drifts into 'negative cash flow' in theory below 40% LTV, but the reality is the opposite. I save more in interest per month than most newbies hope to earn to replace their job. I can deploy 5 figures per month extra against the next crummy commercial loan I have over 6% if I want to, or invest elsewhere. The option is available because of my 'negative cash flow' I guess.

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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
8y
I hate the idea of buying cash flow so will leverage to the maximum possible. Having dead equity irks me to no end. Equity only kills your true cash flow. Not truly investing in my opinion. 100% leverage is my goal providing a property supports it in the worse case scenario. Unfortunately 100% is very difficult to attain in my market. Wealth building is a risk game and educated risk is good risk.
I have high cash flow and a large HELOC to rely on as a back up.
I like the Trump investing mentality, you lower your risk when it is not your money at risk.
11 Reply
Monica Morff
Investor · St. Cloud, MN · Member since 2016 · 42 posts · 40 votes
8y
We have a moderate amount of risk- we usually have 20% into our properties per lender requirements, but then we update and take out a HELOC or refinance in order to get our money back (and then some). So for the most part, we don't keep our own money in properties and just let the tenants pay down the mortgage.
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
8y
I had a bunch of higher rate and higher risk commercial and seller-financed loans, so I paid them off last year and am about 50% leveraged across the portfolio I'd guess.
I like the peace, honestly. Plowing 5 figures a month against some other higher rate seller financed loans still while opportunities are slim. But I also have a fully funded emergency and dry powder fund at the ready. Just in case...
But if things stay frothy, I'll be completely debt free in a few years and won't need to bother hunting anymore anyway. Cheers!
8 Reply
Aaron Hunt
All Over, USA · Member since 2017 · 689 posts · 756 votes
8y
I'm in the accumulation phase of life/investing - so leverage + time is the name of the game for me.
Started out <2 years ago. Have two properties which are both 5% down owner-occupied. I am about as leveraged as it gets. I worked hard to keep my credit score above 800...so I plan on making the most of it. Will be buying my 3rd owner-occupied financed property with 5% down around July.
The first place has appreciated tremendously in one year of ownership. I'm ahead around 6x (pre-capital gains tax) on my initial investment in the form of equity (down payment and closing costs only), and tenant has paid a years worth of mortgage as well. Currently cash-flowing with 5% down initial investment. We'll see how the second unit does, but it may not cash-flow until interest rates get jacked up and people are forced to rent/drive the rental market up to catch up with the sales prices.
Would like to pull equity out and throw it at another property eventually, maybe a HELOC, but won't be able to right now since it's owner-occupied financing with low interest rates and that might raise flags and require me to refi.
Disclaimer: My day to day income will be high enough for me to comfortably support the properties in any economic downturn, and I live well within my means.
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Luke Myers
Patterson, CA · Member since 2017 · 23 posts · 10 votes
8y
Currently moving to a zero leverage all cash strategy. Currently about 50% levered . Growth started at 95% leverage 6+ years ago. Taking some cards off the table for the current California housing bubble.
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Alexander FelicePro Member
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
8y
Probably around ~65-70% although I would prefer to be much more.
@Thomas S. is right, 100% leverage is the way to go. Don't own assets, just control them.
Careful to leverage your 401k because it can be used as reserves. This allows you to deploy more of your actual cash with less worry.
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
8y
Erik Sherburne around 60% is what an economist will tell you from a risk/return perspective. While many will love to leverage as much as possible all you have to do is go back 10 years and those that survived were those who were not over leveraged. We have about another 3-5 years before we hit the skids again and with interest rates climbing and savings at an all time low and personal debt an all time high it will be a bumpy ride. Being over leveraged coming out of a down economy is not as bad as over leveraged during market peak is very risky.
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
8y
The major problem with investors wanting to reduce their leverage is they are simply buying their own income/cash flow. Once a property surpasses 40% equity (or less) the property itself drifts into negative cash flow in most situations. It is no longer a asset.
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
8y
Originally posted by @Thomas S.:
The major problem with investors wanting to reduce their leverage is they are simply buying their own income/cash flow. Once a property surpasses 40% equity (or less) the property itself drifts into negative cash flow in most situations. It is no longer a asset.
Residential house & plex-only investors tend to think that all loans are fixed forever at 4% or something. Blanket statements about leverage with blinders on. I dont rush out to pay off those products, either.
But not all loans are awesome. I assure you that paid off real estate is still an asset, especially commercial property that no longer is burdened by crappy commercial terms. Adjustable, callable, balloons, rates over 5% and bothering you every year for your financials.
You can say low-levered property drifts into 'negative cash flow' in theory below 40% LTV, but the reality is the opposite. I save more in interest per month than most newbies hope to earn to replace their job. I can deploy 5 figures per month extra against the next crummy commercial loan I have over 6% if I want to, or invest elsewhere. The option is available because of my 'negative cash flow' I guess.
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
8y
Problem with most non commercial investors is that their mortgages are in the 5% interest range or less. With the opportunity value of cash in the range of 10% they are losing minimum 5% return on every dollar of dead equity they have buried in a property.
100K in equity is worth $866/month. With mortgage interest rates at 5% they are losing $433/month or, to relate to cash flow, they are eating $433 of their positive cash flow before they deduct any other expenses. Not too many properties able to carry that type of deduction without veering into negative cash flow.
Buying cash flow is definatly not investing and extremely expensive. If I want security I would leverage my property 100% and put the cash value in a income fund. At least there it would earn it's keep.
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Erik Sherburne
OP
Investor · Saint Paul, MN · Member since 2015 · 98 posts · 64 votes
8y
Great feedback everyone! I think it is interesting the variety of answers. I'm trying to stay conservation and I have BRRR'd a couple times but don't want to be completely leveraged.
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
8y
Not very - maybe 25%? I'm pretty conservative financially, though I don't disagree with the notion of leverage for growth and higher returns. I'm just not that keen on exchanging maximum risk for maximum return. There's no right answer to the question - if you are in the growth phase, you almost certainly need to consider leverage because you have one thing working against you - mortality. If you could live forever, then the only real consideration would be how much you have to spend and how fast you want to grow.
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Robert Cheek
Saint Joseph, MI · Member since 2018 · 18 posts · 27 votes
8y
Currently only about 20% . Haven't been this low in a long time. Have been getting things in order to step into another small-mid size apartment building.
2 Reply
Account Closed
Investor · Seminole, FL · Member since 2016 · 94 posts · 41 votes
8y
You may be able to find some more creative ways of investing in Brandon’s book - investing with low or no money down- there were a few early podcasts that mentioned some pretty creative Unfortunately I couldn’t find it. Leverage is bad when the market dips or crashes and you feel the ripple in your wallet.
1 Reply
Frank Adams
Loveland, CO · Member since 2010 · 110 posts · 194 votes
8y
Beginning at about age forty we started slamming every spare dollar toward paying off our mortgages and within a few years paying cash for new properties and continuing to rid ourselves of debt. By the time I was 52 we were debt free with about $85,000 a year in interest income. We had sold our rentals and carried the mortgages. Over time some of those mortgages were retired so we tried to do one or two flips per year and carrying those mortgages.
We're actually pretty fiscally conservative or we could have acquired a lot more property because we lived in Houston during the crash and recovery of the eighties.
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Aaron Hunt
All Over, USA · Member since 2017 · 689 posts · 756 votes
8y
Age and wealth accumulation targets should play a huge role in this.
Those who are younger, 30-40 years out from "retirement" age (65+) should remain extremely leveraged to let time pay off their investments, and let their money work for them.
The exception are likely those freebirds who can live on $30k a year passive income from their late 20s/early 30s and, maybe don't care or need to be extremely leveraged at any point.
Those nearing retirement in the next 5-10 years, probably don't want to be leveraged much either.
I will say after many years of growing the nest, I can't imagine how I'll ever be able to "spend down" all I've earned and accumulated over the years. Will probably be great for my kids and their kids, I suppose.
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Keri Carpenter
San Francisco, CA · Member since 2017 · 26 posts · 38 votes
8y
I'm only about 20% leveraged. I have never taken a cash out mortgage nor ever done anything but pay down the mortgages every month over the 10 years I've owned them. I'm hoping to one day live off the cashflow. I'm about 20 years out from retirement, but I'm hoping to/expecting to functionally retire from corporate life within a few years off the cashflow.
2 Reply
James Ma
Burnaby, BC · Member since 2017 · 283 posts · 268 votes
8y
@Thomas S. Curious where you get the number $866/month from 100K equity ?
I understand the more equity in a property the less hard your money is working for you but I wouldn't go as far as to say it's no longer an asset since it is still making you money, but it is certainly a less profitable investment
3 Reply
Chris Cyr
Investor · East Bridgewater, MA · Member since 2015 · 17 posts · 17 votes
8y
As much as possible!
0 Reply
Steve Sell
Investor · Cary, IL · Member since 2017 · 15 posts · 14 votes
8y
@James Ma

I believe the figure comes from $100,000 * 10% / 12 months. My calculation came out to $833. Forms of this debate frequently re-occur around these forums. Aside from the differences in ideology, I find the discussions stem in part from the underlying premises and the syntax used.

Basically if money should return at least 10% on average, the leverage camp [which I'd consider myself] more or less views a return below that baseline as effectively "negative CF". So if you're buying down mortgage debt at ~5% with $100,000 that's $416 below the 10% baseline. Don't believe anyone is insisting that a free and clear property will be draining your bank account month after month; it's more a matter of how you frame the argument.

In regards to the original question; the value of property I own / the non-financed equity I have in those properties is about 5. That goes down if to about 3x if reserves I'm currently holding are added to the denominator. Trying to deploy about half of those at the moment.
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Caleb Heimsoth
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
8y
I’m currently about 27 percent equity across my three properties so I guess about 73 percent LTV. I would prefer to be 30-40 percent.
0 Reply
Shiloh LundahlPro Member
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
8y
I am in what @JD Martin called the growth phase so I am highly leveraged. I will continue to use a lot of leverage until I get to where I want to be at which time I will go back and forth from growth to stabilization and so forth.
What I do in order to lessen the risk of losing in a downturn is I don’t buy for appreciation. I buy for cash flow and equity accumulation as my tenants pay down my loans. I invest in C and B neighborhoods where the demand will stay high through downturns. I also sell on the lease option where my tenants have a vested interest in the property and if they don’t excecise the option then I rinse and repeat.
It’s always good to also have a good sized emergency fund in case anything happens as well.
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
8y
If the goal is income generation then the goal should be to invest money outside of your income properties to generate the maximum "safe " returns. As long as mortgage rates are lower than potential returns on something like income funds a wise investor would have minimum dead equity. My funds have averaged between 7% and 16% over the past 10 years far surpassing mortgage interest rates. It makes no financial scenes to have the cash sitting in a property when it can create the same over all financial security as a paid of property while still earning it's keep. Equity in a property is cash hoarding since it generates the bare minimum in ROI and eats any returns the property itself could generate when appointed a decent return.
The reason leverage is preferred is because it generates maximum ROI. Cash hoarding is what you do when you have more money than you need.
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Peter TverdovBusiness Member
Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
8y
I created a rule that I will not let my portfolio to go about 75% LTV. If you need cash in an emergency and don't have enough or can't REFI you are going to lose your shirt. I notice a decent amount of people on this site swim naked. Which is good, I aim to scoop up houses from fiscally irresponsible investors. 100% leveraged? Lol. People who use HELOCs as their "cash reserves" especially trouble me. Blinded that those can be frozen by a bank at any time.
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Deborah BurianPro Member
Rental Property Investor · Oklahoma City, OK · Member since 2013 · 1k+ posts · 412 votes
8y
Over the course of our investing we transitioned from maximally leveraged to buying down debt to increase cash flow. It is truly a life-cycle question tied into just how hard do you want to work? Those who choose to scale up still have to manage the employees.
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