Be Careful If You Are Overleveraged
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
District Invest Group545 Reviews
Be Careful If You Are Overleveraged
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesProper capitalization and reserves is the corner stone of real estate investing.
the refi till you die while a good strategy to scale needs to be tempered with fiscal realities if you do hit a bump in the road or like Russ is talking about a brick wall at 100 mph.. this is not about those that will get the Virus this is about those that work in industries that are being shut down.. some will get paid regardless others will get help from various sources but others will have no choice but to either buy food and medicine or pay rent.
Or they may just move in with relatives and leave properties vacant and in C/D areas vacant properties are sometimes worse than having non paying tenants who at least are keeping an eye on the house.
Tough times don't last but tough people do.. be tough be smart and be caring of others IE your tenants.
And for sure having owned hundreds of C/D class rentals myself I know once the word gets out in that tenant base there are going to be lots of them playing games with you.. But hopefully you know the good ones from the characters that are just out to take every advantage they can get as its their way of life
140 Replies
- Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes6y
Agreed. Many stretched themselves thin thinking a dip wouldn't come in the near future. Everyone will need to buckle down and get through it.
- Rental Property Investor · Maryville, TN · Member since 2009 · 529 posts · 414 votes6y
my question is, do i complete an in progress deal that is a class "c" at a whopping 7 cap, started before this was an issue, or wait to see if we get a much needed correction in the market?
- Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes6y
@Will G. A 7 cap for a C? For a C property i'd shoot for a higher return. Then again every deal is different, if in that market that's a great deal i'd continue with it.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes6y
Originally posted by @Will G.:
my question is, do i complete an in progress deal that is a class "c" at a whopping 7 cap, started before this was an issue, or wait to see if we get a much needed correction in the market?
I think that depends on the fundamentals of your market. One thing that the housing collapse of a decade has done to younger people, is given them the sense that housing prices dropping is a more common phenomenon than it is, on a national scale at least. Only twice since the great depression did housing prices retreat nationally....the housing collapse, and in 1991 they dropped about $1800. Now thats on a national level. On a micro level, prices can and do drop in certain locations all the time. Heck, there are places that have dropped in value from just 10 years ago during the greatest housing boom ever. There were places that went up in value during the housing collapse.
Its important to focus on your local market, and the specifics of that location to come up with a plan of action for what you should do.
District Invest Group545 Reviews - 6yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Proper capitalization and reserves is the corner stone of real estate investing.
the refi till you die while a good strategy to scale needs to be tempered with fiscal realities if you do hit a bump in the road or like Russ is talking about a brick wall at 100 mph.. this is not about those that will get the Virus this is about those that work in industries that are being shut down.. some will get paid regardless others will get help from various sources but others will have no choice but to either buy food and medicine or pay rent.
Or they may just move in with relatives and leave properties vacant and in C/D areas vacant properties are sometimes worse than having non paying tenants who at least are keeping an eye on the house.
Tough times don't last but tough people do.. be tough be smart and be caring of others IE your tenants.
And for sure having owned hundreds of C/D class rentals myself I know once the word gets out in that tenant base there are going to be lots of them playing games with you.. But hopefully you know the good ones from the characters that are just out to take every advantage they can get as its their way of life
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Unfortunately there has been too much rationalization of poor decisions with statements like, "everyone needs a place to live". Although people need a place to live, it is not necessarily your property. During tough times people move in with friends or family to save money. They move to a different city to find work. Some people live in their car!
BRRRR is nothing more than equity stripping. Equity stripping always decreases cash flow. There is an argument that removing all equity reduces risk. The idea is you just walk away from the property and let the bank foreclose. In most cases this is a catastrophic financial situation.
Not much to do now besides working hard to keep tenants in your properties and paying. And for the record Russell was right as always...
- Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes6y
I'm all cash, zero debt. I've been told (in a round-about way) that strategy is stupid, because my equity is "dead".
I've been trying to wrap my head around that sentiment for a very long time. I can certainly see how leaving equity in a property is an opportunity cost. I've even been considering taking on some debt to acquire more properties, and maybe I will. I can certainly see that in the event property values crash, having cash on hand will be handy (pun intended) to acquire more properties. And so therefore if I were to leverage some of that equity, that might be a good thing for me.
But I suppose this is as good a time as any to mention here why I invest in real estate in the first place. It's not because I think it's the most profitable investment ever - it's not. It's not because I see it as my best road to wealth - that's debatable. I have always looked at real estate as a good investment because it's tangible, so long as property rights remain. The question I ask myself in times like these is not what am I going to do if I have a vacancy, but if I might keep at least one vacancy in the event I might need it for myself!
When a currency collapses, all that remains is all that remains. Land remains. Gold remains. Will property rights remain???Faith-based paper currency is a tool, not an asset - it is also vulnerable - that's history, not junk science.
At the very least, this is going to catch some of the over-leveraged off-guard with devastating consequences, unless the banks issue foreclosure moratoriums in parallel with eviction moratoriums. They didn't do that last time. Maybe they will this time. Or maybe they will be happy to take all those properties back so they can write fresh loans on them all over again! LOL - I know, I am one cynical dude.
This is different than last time. Last time, the US market crashed and that had an affect on the global economy. This time, the entire global economy is going to crash at the same time. This is uncharted territory in the history of the world - quite literally. I think the last thing to panic about is how many people the virus will kill. The thing to worry about is how this is going to play out economically, globally, which could trigger changes to other things, things more important than a few, or even many, deaths - sorry. And so therefore, my conclusion is that the world-wide decision to quarantine the world is a very bad decision. A better course of action would be to keep on keepin' on, and mourn the deaths of our loved ones as they pass, as martyrs for the rest. We shall see. Too late now, things are in motion that can not be undone.
- 6yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Account Closed i support having C/D class paid for assuming thats what you run in Milwaukee.. as for letting us old folks kack off cant get behind that one :) you know 65 is the new 45.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes6y
Attached is a guide for businesses to help manage and secure cash during times of crisis.
- Investor · Port Townsend, WA · Member since 2014 · 103 posts · 50 votes6y
@Russell Brazil @Jay Hinrichs @Joe Splitrock
"We are hitting a brick wall at 100 miles per hour"
"Proper capitalization and reserves is the corner stone of real estate investing"What wise words above are. There is a proverb in Asia that says, even a Dog in a School can learn to read and write in 3 years...meaning even a dumb person exposed in right environment can be smart and successful in 3 years.
There is always the urge to want to own ''more doors'' for me but heeding the wise words from the folks who have been around the block a few times has been life-saving. I am not quite there yet...but I will be there in a few years if I can weather this crazy storm.
Thank you for your sage advice!!
- Hunlock Creek, PA · Member since 2019 · 68 posts · 35 votes6y
It's encouraging to here these long term investors talk about owning property non-leveraged. I'm new to this game of REI and my one property is owned debt free.
Also interesting to note is there are no comments stating how dumb it is to not take the equity out of your real estate. Either those commenters respect the long term investors posting or they are to nervous to even think about how great leverage is?
- Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes6y
My business model is to work with tenants having problems because I think most tenants are good people that want to pay their bills. I'm going to find out if helping people when they have tough times means they step up when they are able when times are tough for all. In this situation, I'm going to find out if I'm right or wrong about who has good character and if I'm right or wrong about how people of good character will respond when they have an opportunity to take advantage of the situation and refuse to pay rent because evictions are not allowed.
For my people that are unemployed, due to the virus and claiming inability to pay (or pay in full), I'll need proof but I"ll work with them.
I **sincerely** hope that I'm not wrong about most people. I have seven empty units that will soon be online and those will be marketed to old people with SS or section 8 as a mitigation strategy.
But *If* I it turns out that I am wrong about most people,
- I could probably pay my mortgages and make my bills with no rent at all on my 49 units for about a year; and I don't think no rent at all will happen-- By my, estimates 19 of my tenants are at VERY LOW risk of defaulting on rent payments, and another 13 are at low-moderate risk.
- When this is over I will change my business model and admit that the hard-noses were right
- and anyone that screws me over when they could have paid something during this crisis or won't provide detailed info to prove their situation, will get non-renewed just as soon as this crisis is over.
I expect to be right. Gonna' know soon, I guess.
- Investor · DFW, TX · Member since 2019 · 8 posts · 9 votes6y
Risky to be over-leveraged in any economic climate, the only potential upside is that the U.S. government could suspend mortgage payments temporarily (Italy already did this!). Given the banks can now borrow for 0-0.25% with the additional $1.5 Trillion+ pumped into the economy by the FED, they should be able to shoulder a couple of months of missed payments. Either way someone is eventually going to have to pay that mortgage if tenants can't pay their rent, whether it be the property owners or the U.S. Government. It is a unique time to be alive for sure, one for the history books.
- Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes6y
We're also guilty of being free & clear (20+ years), 'dead equity' abounds. We have no debt & never had to have a mtg on any of our 4 homes, but did play with a heloc back in the day when tax lien/foreclosed properties were going for cents on the dollar. But paid that down quickly as we flipped the properties.
Each of our banks will often push us to finance some of those they know we have but given our REI cash flow simply paying cash or just writing a check from the 401(k)-solo is still much easier. Unlike our friends IRA's, 401(k)'s we have never had a property drop in value regardless of any recession or that of the 2008 housing debacle.
Unleveraged & content!!
- 6yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Brian Kueck:
Risky to be over-leveraged in any economic climate, the only potential upside is that the U.S. government could suspend mortgage payments temporarily (Italy already did this!). Given the banks can now borrow for 0-0.25% with the additional $1.5 Trillion+ pumped into the economy by the FED, they should be able to shoulder a couple of months of missed payments. Either way someone is eventually going to have to pay that mortgage if tenants can't pay their rent, whether it be the property owners or the U.S. Government. It is a unique time to be alive for sure, one for the history books.
todays fed rate has zero to do with existing loans.. those are already booked and sold..
- 6yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
I think that no matter how many times you say it, it won't hit home for some. Invest with conservative assumptions. Generate positive cash flow. Invest for the long-term. Invest with a reserve (I like $10,000 - $15,000 per 1-4 unit property here in Denver, will vary by market and property type and investor).
The good news is that we all see it coming. There IS still time for folks to shore up their reserves.
Now's a great time to stop eating out. To track your spending. To not buy the fancy car. To not buy the fancy owner-occupied place. To control the rest of your spending. To build up as much reserve as you can (6 months+ - I like a "year of runway").
Once you've done all that, guess what? It's then still a great time to continue your long-term approach to sustainable investing. Investing with a reserve for your business, for cash flow, in great deals. With the option to manage yourself, or contract it out.
I wonder if the BP community as a group really ARE overleveraged and in over their skis - or whether that is a small minority. The amount of discussion on responsible investing over the past 6 years, my time here, has been overwhelming. Folks have been afraid of a recession the entire time. And the entire time, folks have discussed how to invest sustainably, for cash flow, with reserves.
In all of the discussion recently, I'm truly not seeing many folks who are vocal about fearing they are in a bad way with their portfolio, or who are terribly afraid of the economy. If I'm wrong, can some folks chime in who are feeling this way?
- Member since 2020 · 53 posts · 23 votes6y
This is one thing that I've always wondered about. I see people preach on here about BRRRR and while I think getting to invest the same capital over and over again sounds interesting, it's way too risky for me and my current situation.
I've always thought that it would make more sense to own properties free and clear, because of the extra freedom it provides. While you obviously want to get every penny possible with something you own out right you have significantly more room to lower rent to help make sure that you always have a tenant. I get that lowering rent too much will attract the wrong tenants and even scare some good tenants away because there may be something wrong with the unit, it seems reasonable to me that you could ask a few hundred under "market value" and still get fine tenants in a relatively short amount of time.
- Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes6yCivility is always a good plan. Most experts believe that the majority of American's live paycheck to paycheck (78%) and I'll bet you that the percentage of renters living pay check to pay check is even higher. The reality of the situation is that if you evict a pay check to pay check renter you are likely just going to replace that person with another pay check to pay check renter. I believe that **right now** in this situation 19 of my 42 tenants will continue to pay rent without issue. Another 13 are pretty likely to continue to pay rent without issue. That leaves me with 10 renters that are likely to be in trouble (just under 25%). The reason I have a pretty good idea of each tenant's personal situation, is because I know my tenants. I screen carefully and I work with people when they have **temporary** problems all the time. Some of my tenants (that I feel are at high risk for coronavirus financial impacts) will be able to get unemployment or have access to savings or family support that will get them through a tough spot. I don't think even my high risk tenants that are in trouble will tell me to F*off because evictions are on hold. Unless we have a prolonged depression where NO jobs are available and no assistance is available to the unemployed, people will go back to work. For the record, I've not had one tenant screw me over on a payment plan in the last 4 years.
Originally posted by @Account Closed:
Originally posted by @Jill F.:
My business model is to work with tenants having problems because I think most tenants are good people that want to pay their bills. I'm going to find out if helping people when they have tough times means they step up when they are able when times are tough for all. In this situation, I'm going to find out if I'm right or wrong about who has good character and if I'm right or wrong about how people of good character will respond when they have an opportunity to take advantage of the situation and refuse to pay rent because evictions are not allowed.
For my people that are unemployed, due to the virus and claiming inability to pay (or pay in full), I'll need proof but I"ll work with them.
I **sincerely** hope that I'm not wrong about most people. I have seven empty units that will soon be online and those will be marketed to old people with SS or section 8 as a mitigation strategy.
But *If* I it turns out that I am wrong about most people,
- I could probably pay my mortgages and make my bills with no rent at all on my 49 units for about a year; and I don't think no rent at all will happen-- By my, estimates 19 of my tenants are at VERY LOW risk of defaulting on rent payments, and another 13 are at low-moderate risk.
- When this is over I will change my business model and admit that the hard-noses were right
- and anyone that screws me over when they could have paid something during this crisis or won't provide detailed info to prove their situation, will get non-renewed just as soon as this crisis is over.
I expect to be right. Gonna' know soon, I guess.
ILL be nice. I think you are mis-guided in your thinking. How do you work with people who lose jobs and dont have Cash in the bank? You cant work with BROKE.
Best to acknowledge it aint going to happen and implement plan B or C or D if necessary.
I was looking a record $120,000 income for me this year. Ive already scaled it back. One of my holdings in Vegas is ZERRO income for awhile. Its a MGM run deal.
Very soon I'll know if I am misguided or not but It seems to me that taking a hard-nosed 'evict now' approach if it is even possible in your market (cle has already suspended evictions for 60 days) would be the misguided approach and would not be viewed favorably by most magistrates.
Just curious, but if you don't think working with tenants impacted by coronavirus is a good idea but evictions are halted and/or frowned upon by authorities, what is it exactly that you think landlords should do? - Lender · San Antonio · Member since 2020 · 15 posts · 5 votes6y
@Will G. I keep saying that you make money when you buy. Is the property priced according to the market rent? If you have a good DSCR you should be good.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes6y
Originally posted by @Russell Brazil:
Many of us experienced folks on the forums the last couple years have been expressing concern about people being overleveraged and for strategies like the BRRRR method. Myself, @Jay Hinrichs, @Alexander Felice, @Joe Splitrock @J Scott (Who Ive never been able to tag in almost a decade on here) I know have all talked about leverage, risk and caution. Im not saying this to say hay, Im right, and everyone else is wrong, whch is true btw lol, but to say that if you have the ability to raise cash, do so now before your tenants stop paying their rent. Its going to be at the very least, a bumpy few months here. I dont see some great economic collapse, Im not a doomsdayer or anything of the sorts. But the recession is here, and we are not easing into it.....we are hitting a brick wall at 100 miles per hour.
If you have marginal tenants in c/d class properties, expect that some will not be paying their rent with a moratorium on evictions in many places.
I believe I did it :) But of course then I couldn't tag you so I had to quote you completely
Skyline Properties - Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes6y
You’re thinking of a different site Julia. I am one of the people who was frustrated by all the posts that said it has to cashflow over and over again. I don’t think 1% of the post here said to buy with 3.5% down because we were all taking to investors where you need 20-25% down. Less than 1% said oos flip, maybe 1% of 1%. Same for buying a condo to give to your mom.
Either you focused on less than 1% of the posts, you were looking at a different site and are confused, or you’re making stuff up.
I’ll go the other way 1/2 the posts were I have this problem what would you? 25% were look at this cool things I did, 20% were has anyone done a this kind of investing before, 4% were advertising their service “discretely” (maybe less) and 1% were misc.
You don’t have to be over leveraged to be concerned. I’ve got enough money in the bank to make the next 3 months of mortgage payments if zero of 12 tenants pay rent and my wife gets laid off. (She’s a nurse at UMC here in Vegas and is treating Covid patients as I type.), and I only need 6 of those 12 tenants to pay rent to break even. But I have no clue who’s going to pay in 2 weeks. I hope all of them. But what if none do? What if they ban evictions (directly with a law or indirectly by simply keeping the courts closed.)
Except for the 1% of the people here who pay all cash for every property I’m probably one of the least leveraged posters and it’s still concerning. I’m still hoping for the best and this is all overblown, but either way it’s gonna be rough. I’m hoping for all the best for all of you.
- Rental Property Investor · Northern NJ · Member since 2019 · 673 posts · 677 votes6y
Thanks to the crowd who's been around the block and gives out advice. Love reading it.
I'm one of those leveraged guys in an owner occupied 3 unit. While my tenants pay my mortgage on the good days, if they were out of jobs my budget would shrink. I do have the required reserves and I live a frugal lifestyle so I'm not super worried as my income can support my mortgage.
This might sound off but Im still thinking of going after a owner occupied financing 4 plex this year, even with all the things going on. I'm active duty so my income is pretty reliable. Am I nuts?
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes6y
Wow and you just joined bigger pockets today Julia? Interesting. You sure read a ton of posts on your first day. No chance you’re just another troll?
Maybe they should ban new members from posting for a few days. Or use registered phone numbers to prevent multiple accounts?
Something to slow you guys down.
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