Anyone reduce their risk rather than buying more?

OP

Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes

7y

Originally posted by @Russell Brazil:

This is an interesting question, because in 2009-2011 I took a lot of risks, by buying in the face a collapsing economy. Then I shifted towards reducing my risk as my goal shifted from wealth creation to wealth preservation. But I was just discussing with @Brendan Lawrence just last week, that now with a certain amount of wealth, maybe it is time to shift towards taking on some more risk in the portfolio after getting over a hump of a getting to a net worth with a certain comfort level. If Im to hit my net worth goal I have for age 50, I likely do need to add a little bit more juice back into the equation.

Care to share what that NW goal is for perspective?

[email protected]301-893-4635 Podcast Guest on Show #192

Russell BrazilBusiness Member

Moderator

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

7y

Originally posted by @Jack B.:

Originally posted by @Russell Brazil:

This is an interesting question, because in 2009-2011 I took a lot of risks, by buying in the face a collapsing economy. Then I shifted towards reducing my risk as my goal shifted from wealth creation to wealth preservation. But I was just discussing with @Brendan Lawrence just last week, that now with a certain amount of wealth, maybe it is time to shift towards taking on some more risk in the portfolio after getting over a hump of a getting to a net worth with a certain comfort level. If Im to hit my net worth goal I have for age 50, I likely do need to add a little bit more juice back into the equation.

Care to share what that NW goal is for perspective?

Im trying to hit $7 million by age 50. Im 40 now.

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Keith A.

Rental Property Investor · TX · Member since 2019 · 236 posts · 392 votes

7y

Great topic. I feel most comfortable having no mortgages and using one HELOC to use for repeat purchases. As you can imagine, I am a slow purchaser.... maybe one property every 2 years but I feel the risk is much lower and I don't feel as exposed to the unknown.

David Zheng

Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes

7y

its literally just a question about risk tolerance and timing. Personally. I like growing fast which means more risk but much richer rewards. I just went under contract for a triplex today bringing my total units to 35 in 3 years.

I certainly like the idea of having 0 mortgages, but owning less than 100 units before I'm 30 is not flashy enough :P

Bill Pate

Real Estate Investor · North Ridgeville, OH · Member since 2016 · 97 posts · 81 votes

7y

Personally I don't have a lot of tolerance for risk with REI. I have approached my personal investing very cautiously, but also most of the 7 properties we have are owned without a mortgage. I have a couple of small personal loans that were used to help finance two of the properties. The total owed for the personal loans is about $22k, so not very much. A lot of people spend more than that on a car. I started investing in RE simply for income and wealth preservation. 12 years later that principle has not changed. Although now if I do purchase any more properties they are going to be either turn key or pretty close to it. I don't have desire to any more full gut rehabs. I have done four of them in the last 18 years.

Kyle McCorkel

Rental Property Investor · Hummelstown, PA · Member since 2015 · 638 posts · 653 votes

7y

How does having less debt equate to less risk?

Let's say you have properties worth $2M and you have $1M in debt on those properties. Let's also say you have $1M in cash, so you could pay off the properties if you wanted.

Now, let's say you pay off the properties and now have $0 cash and properties worth $2M with zero debt.

Now, let's use your extreme example of a natural disaster wipes out ALL your properties and insurance doesn't cover it at all....would you have been better off paying off the properties, or keeping the debt?

Let's say a natural disaster doesn't come, but instead you have a few vacancies and also need to replace a few roofs and furnaces. On top of that you still need to pay property taxes and insurance. Uh-oh, Mr. Bank, can I have some of that money back? (Answer: Nope, not without qualifying for a loan and paying closing costs again!)

My point being that debt is fine and even preferable if you have cash reserves. High cash reserves equals less risk. Dead equity is more risk because it's cash you can't access in an emergency.

Russell BrazilBusiness Member

Moderator

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

7y

Originally posted by @Kyle McCorkel:

[email protected]301-893-4635 Podcast Guest on Show #192

How does having less debt equate to less risk?

It is a fundamental rule to investing....leverage increases risk.

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OP

Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes

7y

Originally posted by @Kyle McCorkel:

How does having less debt equate to less risk?

Let's say you have properties worth $2M and you have $1M in debt on those properties. Let's also say you have $1M in cash, so you could pay off the properties if you wanted.

Now, let's say you pay off the properties and now have $0 cash and properties worth $2M with zero debt.

Now, let's use your extreme example of a natural disaster wipes out ALL your properties and insurance doesn't cover it at all....would you have been better off paying off the properties, or keeping the debt?

Let's say a natural disaster doesn't come, but instead you have a few vacancies and also need to replace a few roofs and furnaces. On top of that you still need to pay property taxes and insurance. Uh-oh, Mr. Bank, can I have some of that money back? (Answer: Nope, not without qualifying for a loan and paying closing costs again!)

My point being that debt is fine and even preferable if you have cash reserves. High cash reserves equals less risk. Dead equity is more risk because it's cash you can't access in an emergency.

Sure, but the probabilities of those events occurring is a lot smaller I presume. Also, take your natural disaster scenario not covered by insurance. Now you have a negative net worth instead of breaking even, especially on full recourse loans. You can spread out your real estate around the country. Vacancy in Seattle?? Maybe, but this is a higher risk in podunk Iowa than in Seattle.

I see your points, but it all depends on probabilities and mitigation.

2 Reply

Lane Kawaoka

Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes

7y

I'm looking to sell my remaining 4 turnkey rentals and go into mobile home parks. MFH is looking overheated.

John Barrett

Rental Property Investor · Everett, WA · Member since 2015 · 457 posts · 386 votes

7y

@Jack B. I like to manage the risk by combining strong cash flow (high margins), equity & cash reserves as a means to mitigate the risk of carrying debt. If the market turns as it appears it is starting to in Seattle, you have flexibility to maneuver / weather the storm. Holding cash and equity in the properties does lower returns but I think of it like paying for an insurance policy. It doesn't guarantee that you will be alright but increases the odds.

As previously mentioned leverage adds risk but if you use it properly it also allows you to grow your cash flow which can increase your margin of safety. I don't know what's going to happen and I am keeping an eye on the changing market conditions because like everyone I am expecting a correction. That said, I think you can position yourself too conservatively. It's very hard to measure lost opportunity cost.

Best of luck with your investing.

John

Charles Kao

Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes

7y

@Russell Brazil @Jack B. I echo Russ's sentiment. We have acquired alot in the last 3 years so have been passing over some deals we would have normally taken for a commission or wholesale fee to strengthen our position but not focused on principal paydown as much as just being more selective on properties that really grow our money or find solid return with capital preservation.

Kiley N.

Honolulu, HI · Member since 2017 · 231 posts · 191 votes

7y

Nicely put, @John Barrett , the optimal balance between cash, equity, leverage, and cash flow is an elusive target that probably changes by the minute in today's world of unlimited information. Multiply that by the complexity of each investor's individual circumstance and you get an infinite number of optimal strategies. That's part of what makes the discussion on strategies so interesting.

Over leveraging to increase cash flow carries certain risks. Under leveraging carries a different set of risks. Understanding and managing that balanced level that fits our personal situations at different stages of our investing careers is the goal we all strive for.

Thanks for the question @Jack B. ! Always great to learn about how other REIs view things from their respective places along the journey.

Also shout out to @David Zheng , gotta love that self awareness :)

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

Maybe we can get @Steve Vaughan to chime in on this thread.. I really admire his thought process and U guys are in the same state..

although I think you glossed over some of what Ramsey said.. a lot of debt these days that can be gotten is 30 year fixed and cannot be called unless you default.

where there is risk is 20 due in 5.. last go around in the GFC this sunk a lot of MF operators and other smaller commercial developers when credit froze and the banks would not refi and the existing bank called the loan.

For our mom and pop investors in this site.. their risk as i see it is thinking HELOC's are all that when they are just like commercial loans they CAN be called and they CAN be frozen..

Its understanding the documents you sign. In my personal view at the tail end of a 4 decade run here.. to me its all about having my summer and winter homes paid for.. nice cash in the bank.. and then be the bank.. not the operator. sometimes being the bank you end up as the operator by default. but I like the business aspects of being the bank as opposed to the business of dealing with tenants and their ups and downs.

Although for asset class's as mentioned above i have owned 4 MHP ( they were turn arounds) but i could see keeping the next one i buy..

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Steve Vaughan

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

7y

Originally posted by @Jay Hinrichs:

Maybe we can get @Steve Vaughan to chime in on this thread.. I really admire his thought process and U guys are in the same state..

although I think you glossed over some of what Ramsey said.. a lot of debt these days that can be gotten is 30 year fixed and cannot be called unless you default.

where there is risk is 20 due in 5.. last go around in the GFC this sunk a lot of MF operators and other smaller commercial developers when credit froze and the banks would not refi and the existing bank called the loan.

For our mom and pop investors in this site.. their risk as i see it is thinking HELOC's are all that when they are just like commercial loans they CAN be called and they CAN be frozen..

Its understanding the documents you sign. In my personal view at the tail end of a 4 decade run here.. to me its all about having my summer and winter homes paid for.. nice cash in the bank.. and then be the bank.. not the operator. sometimes being the bank you end up as the operator by default. but I like the business aspects of being the bank as opposed to the business of dealing with tenants and their ups and downs.

Although for asset class's as mentioned above i have owned 4 MHP ( they were turn arounds) but i could see keeping the next one i buy..

Nicely put, Jay, and thank you for the mention.

I paid off or refinanced with private money all of my commercial loans. Sick of the hassle of reporting my financials every year. The calls, the rate adjusts.

I remember hearing my community bankers during the GRC- "We have no appetite for lending on that asset type. Period." Commercial RE was what he was referring to. I wanted to buy but credit wasn't available. It might could again be unavaliable when call or expire time comes. Watch your commercial a$$es.

To add to Jay's Heloc warning, I see residential folks using blanket portfolio and commercial products with cross-collateralization clauses and all kinds of small print. All to tap equity and grow more. Not only are most chasing prices up they are using risky leverage to do it. Hope you can sell one house from under the blanket of fine print if you need to...

Not all leverage is the same. I'm happy keeping my fixed resi loans below 6%. I'm paying off or restructured all loans above 6% (since deal-flow stopped being worth the massive effort to me anymore) or were higher risk. I sold a few of my least fave houses into the froth and buy odd or repurpose assets with cash at discounts, between naps.

Podcast Guest on Show #222

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

@Steve Vaughan funny you should mention cross collateral.. I did a loan for a guy on Friday to the tune of half a million.. and he wanted to release some inventory lender would not without full payoff because of that clause. So we got it done for him.. request on MOnday funded on Friday.. saved his deals. he was lucky he knows me and we have a track record other wise he would have been weeks and weeks apprasials red tape to get it done.

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OP

Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes

7y

Originally posted by @Jay Hinrichs:

Maybe we can get @Steve Vaughan to chime in on this thread.. I really admire his thought process and U guys are in the same state..

although I think you glossed over some of what Ramsey said.. a lot of debt these days that can be gotten is 30 year fixed and cannot be called unless you default.

where there is risk is 20 due in 5.. last go around in the GFC this sunk a lot of MF operators and other smaller commercial developers when credit froze and the banks would not refi and the existing bank called the loan.

For our mom and pop investors in this site.. their risk as i see it is thinking HELOC's are all that when they are just like commercial loans they CAN be called and they CAN be frozen..

Its understanding the documents you sign. In my personal view at the tail end of a 4 decade run here.. to me its all about having my summer and winter homes paid for.. nice cash in the bank.. and then be the bank.. not the operator. sometimes being the bank you end up as the operator by default. but I like the business aspects of being the bank as opposed to the business of dealing with tenants and their ups and downs.

Although for asset class's as mentioned above i have owned 4 MHP ( they were turn arounds) but i could see keeping the next one i buy..

That's not what my contracts state though, that's what I'm saying. I've seen others here even posting about this clause as well. Every 30 year fixed loan I've ever seen had a clause in there that they can be called at any time. I even met with a banker recently that acknowledged that, but said it's rare, he sees it happen mostly with HELOC's. What else is it that Dave said that I glossed over IYO? His story was that he was making 250K a year in his twenties, had millions in real estate debt, the bank looked at his loans and decided to call his loans. He couldn't sell that much real estate that fast and he ended up going broke.

Podcast Guest on Show #222

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

Originally posted by @Jack B.:

Originally posted by @Jay Hinrichs:

Maybe we can get @Steve Vaughan to chime in on this thread.. I really admire his thought process and U guys are in the same state..

although I think you glossed over some of what Ramsey said.. a lot of debt these days that can be gotten is 30 year fixed and cannot be called unless you default.

where there is risk is 20 due in 5.. last go around in the GFC this sunk a lot of MF operators and other smaller commercial developers when credit froze and the banks would not refi and the existing bank called the loan.

For our mom and pop investors in this site.. their risk as i see it is thinking HELOC's are all that when they are just like commercial loans they CAN be called and they CAN be frozen..

Its understanding the documents you sign. In my personal view at the tail end of a 4 decade run here.. to me its all about having my summer and winter homes paid for.. nice cash in the bank.. and then be the bank.. not the operator. sometimes being the bank you end up as the operator by default. but I like the business aspects of being the bank as opposed to the business of dealing with tenants and their ups and downs.

Although for asset class's as mentioned above i have owned 4 MHP ( they were turn arounds) but i could see keeping the next one i buy..

That's not what my contracts state though, that's what I'm saying. I've seen others here even posting about this clause as well. Every 30 year fixed loan I've ever seen had a clause in there that they can be called at any time. I even met with a banker recently that acknowledged that, but said it's rare, he sees it happen mostly with HELOC's. What else is it that Dave said that I glossed over IYO? His story was that he was making 250K a year in his twenties, had millions in real estate debt, the bank looked at his loans and decided to call his loans. He couldn't sell that much real estate that fast and he ended up going broke.

I am referring to the average BP mom and pop lender loan full doc govmit one of their 4 they can get.

your referring to commercial loans.. Believe me I understand this scenario better than most it happened to me personally. I had almost 20 million in loans called from 08 to 2010.. Although these were specific commercial lines of credit on one year roll overs.. but five year call is the same thing.. I did negotiate in those loans though that if they called them I had 30 months to pay them off before I was in default I needed all of those months to retire all that debt.. And I bailed out a lot of flippers that were stuck mid project and their helocs were frozen.

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Rob Hoffman

Oakland, CA · Member since 2016 · 104 posts · 47 votes

7y

Originally posted by @Russell Brazil:

Originally posted by @Kyle McCorkel:

How does having less debt equate to less risk?

It is a fundamental rule to investing....leverage increases risk.

@Russell Brazil what is the risk of leverage if you have the reserves to pay off the loan?

Russell BrazilBusiness Member

Moderator

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

7y

Originally posted by @Rob Hoffman:

Originally posted by @Russell Brazil:

Originally posted by @Kyle McCorkel:

[email protected]301-893-4635 Podcast Guest on Show #192

How does having less debt equate to less risk?

It is a fundamental rule to investing....leverage increases risk.

@Russell Brazil what is the risk of leverage if you have the reserves to pay off the loan?

Cash reserves are a way to help you mitigate risk....but that is a factor completely independent of the risk involved in the activity.

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Rob Hoffman

Oakland, CA · Member since 2016 · 104 posts · 47 votes

7y

@Russell Brazil The risk involved in the activity will of course be there regardless. That doesnt increase because of leverage.

I think that I definitely share perspective with @Kyle McCorkel Less risk to have the reserves than the equity.

[email protected]301-893-4635 Podcast Guest on Show #192

Russell BrazilBusiness Member

Moderator

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

7y

Originally posted by @Rob Hoffman:

@Russell Brazil The risk involved in the activity will of course be there regardless. That doesnt increase because of leverage.

I think that I definitely share perspective with @Kyle McCorkel Less risk to have the reserves than the equity.

Then you deny fundamental truths to investing. There are fundamental rules to investing that have been around for as long as modern finance. I didnt write the rules, they merely exist. Bonds are lower risk than stocks. Yield is a measure of risk. Leverage increases risk. Growth stocks are higher risk than value stocks. A class is low risk, D class js high risk. And 100s more. These are fundamentals to investing whether anyone agrees with them or not.

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OP

Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes

7y

Originally posted by @Russell Brazil:

Originally posted by @Rob Hoffman:

@Russell Brazil The risk involved in the activity will of course be there regardless. That doesnt increase because of leverage.

I think that I definitely share perspective with @Kyle McCorkel Less risk to have the reserves than the equity.

Then you deny fundamental truths to investing. There are fundamental rules to investing that have been around for as long as modern finance. I didnt write the rules, they merely exist. Bonds are lower risk than stocks. Yield is a measure of risk. Leverage increases risk. Growth stocks are higher risk than value stocks. A class is low risk, D class js high risk. And 100s more. These are fundamentals to investing whether anyone agrees with them or not.

I agree, it is pretty self evident that leverage/using borrowed money to invest is riskier than paying cash. There are many ways to think about this. One is that when you are highly leveraged, if the economy turns and you can't cover your bills because you lost your job, can't pay that mortgage while it's vacant or have multiple vacant properties, you are not in a great position and are likely to lose it all.

On the other hand, if you are either a) not highly leveraged, using cash instead so you have no payments to make in a worst case situation or b) you have moderate leverage that is balanced with hefty cash reserves that you can use to carry your operations for years to come or even pay everything off...thus suddenly eliminating the risk you carried previously, then you are in a much better position. Personally I like option B since it gives you the OPTION to invest in new opportunities or reduce risk when you need to. You can decide what to do depending on the circumstances, staying flexible...

Also, if you have no money and leverage 1 million to invest and lose it all, your net worth is now negative 1 million as opposed to the zero you started with. Good luck crawling out of that.

Now let's say you had 1 million to invest and lost it, your NW is now zero. Not great, but 0 is better than -1 million.

Matthew Paul

Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes

7y

Originally posted by @Russell Brazil:

Originally posted by @Jack B.:

Originally posted by @Russell Brazil:

This is an interesting question, because in 2009-2011 I took a lot of risks, by buying in the face a collapsing economy. Then I shifted towards reducing my risk as my goal shifted from wealth creation to wealth preservation. But I was just discussing with @Brendan Lawrence just last week, that now with a certain amount of wealth, maybe it is time to shift towards taking on some more risk in the portfolio after getting over a hump of a getting to a net worth with a certain comfort level. If Im to hit my net worth goal I have for age 50, I likely do need to add a little bit more juice back into the equation.

Care to share what that NW goal is for perspective?

Im trying to hit $7 million by age 50. Im 40 now.

Russell you better hurry up , the 10 years between 40 and 50 go faster than you think .

[email protected]301-893-4635 Podcast Guest on Show #192

Russell BrazilBusiness Member

Moderator

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

7y

@Matthew Paul

Luckily I have no kids. That helps both from a spending standpoint and having more time to work.

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