Anyone reduce their risk rather than buying more?

Buying & Selling Real Estate
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Anyone reduce their risk rather than buying more?

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

Buying more real estate may increase your wealth faster, but at additional risk. Once you have money, even if just over a million, could it be better to reduce your risk rather than adding more risk by going into more debt?

Consider Dave Ramsey and all of his loans getting called. Technically investment property loans can be called at any time if you read your contract. One can also have a major natural disaster affect their area and have all of their properties ruined. I know some will scream that insurance will cover you, but not always...They can deny your claim and taking them to court over it may add to your problems if you lose and have legal expenses now to boot. Or you might not be able to get earthquake insurance in some areas for example. 

Paying off some or all of your properties may not make you the most money but it reduces your risk. You may still be exposed to civil liability risks, but it would make sense that you are more likely to be sued when you have 100 units than you would if you have 10, as you are far more exposed to liability with 100 people.

Then again having more money by taking one more risk may insulate you financially a little bit. If you end up worth 5 million and get sued for 1 million, you're still doing OK...But if you have only one million and get sued for 1 million, well...

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Russell BrazilBusiness Member
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
7y

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.

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  • Matthew Paul
    Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
    7y
    Originally posted by @Russell Brazil:

    @Matthew Paul

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

      I got married at 40 for the first time , had first kid at 44 , second at 47 . Yes they are expensive little critters , but its fun .  

    Somebody told me something years ago , I refer back to it alot .

    "Nobody lies on their death bed and says " I should have spent more time at work " 

    I work because I still enjoy what I do , plus the money is great , I invest so when I get up one morning and say I am tired of this , I still have a good income 

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  • Randy Janoe
    Lender · Asheville, NC · Member since 2019 · 60 posts · 50 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..

    I see this a lot on the consumer credit side. Really two flavors. 1) Someone that has the largest HELOC they can get to use as unemployment insurance. 2) someone has the largest HELOC they can get and peg it from day one.

    They disregard the 18 and 12 month notifications that their LoC is approaching the end of the draw period and will enter into 15 year amortization. That could really crush some cash flow going from interest only to amortized payments on a fairly fast schedule. Then they want to refinance and either new debt ratio doesnt work, new ltv is off or macro conditions necessitate crunching credit lines. Not to mention a decent bank is monitoring line performance and updating values consistently to keep ltvs in bounds.

    Use it as short term liquidity and use other means to finance long term.

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  • Max T.
    Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
    7y

    Some might argue that having paid off property puts all of your equity at risk.

    While having mortgage property only puts the bank's money (and your credit) at risk.

    Which is more risky?

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