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
Most Popular Reply
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
- 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 got so excited that I tagged J Scott that I forgot to post :)
To steal from Barbara Mandrel, "I was debt-free when debt-free wasn't cool." Virtually everything I did was cash. Eventually I partially leveraged some properties, but most of my portfolio I own free and clear and the stuff that's leveraged is at 50-60% at most. I know it was a conservative approach, and that I was leaving money on the table, but I've lost my *** before in a big way on real estate. I'm not dumb enough to do that twice, no matter how I look.
Smart debt generates profit, non-debt generates freedom - freedom to absorb vacancies, not have to come up with money for mortgages, etc. Yes, you exchange some cash flow by not using leverage but you gain flexibility. I sleep very well at night with my paid-for properties.
Skyline Properties - Investor · Bellbrook, OH · Member since 2016 · 63 posts · 39 votes6y
Only when the tide goes out do you discover who's been swimming naked.
- Investor · Bellbrook, OH · Member since 2016 · 63 posts · 39 votes6y
Words of wisdom!
- 6yAdam TafelBusiness MemberReal Estate Agent · St. Paul, MN · Member since 2017 · 592 posts · 400 votes
@Account Closed - great post! Very curious how you built your business - I've always felt a little too conservative to drink all the brrrrr coolaid. Not hating or saying "I told you so", and I think the majority of educated BP members put thought into their deals to plan for hiccups like this. Hopefully most of us weather the storm!
Upside Property Sales 4.9108 Reviews Before Covid-19 is under control, I agree not to have additional leverage. If I have extra money today, I would put it in cash reserve and save it for raining days in this extremely situation. I don’t think today is a good time to buy and expand, we should be more conservative in this difficult time.
https://thenevadaindependent.c...
Nevada state governor Sisolak is expected to announce Tuesday evening (tonight) the closure of non-essential businesses, including casinos across the state of Nevada. Looks like more laid off will happen in Las Vegas.
If most people stay home, not working and not being productive, our society economy loss will be very huge.- Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes6y
Be greedy when others are fearful..
- Real Estate Broker · Watertown, NY · Member since 2016 · 1k+ posts · 1k+ votes6y
@Russell Brazil - I pulled my flips off the market today and started the refinance process to get them off hard money. PSCing got shut down and our state is about to enter lock down mode, so there's no reason to hope these will sell anytime soon.
I also dropped the rent on the couple vacancies I have, just to get bodies in them. Sometimes the best offense is defense.
- Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes6y
Can someone smart in the room define "over-leveraged". Is it based on LTV or ROI? Seriously trying to take inventory on my portfolio. We avoided a 100% financed fix and flip on narrowest of narrow margins in time for the crash. But, I have a few rental properties, eaxh leveraged at about 70% LTV pre corona. Each with net cash flow of $14,400/year. A class. I could afford to cut rents 40% until I would be cash flow negative. I haven't been concerned about the affects, but then again we don't know there the bottom is.
Were banks leveraging beyond 70-75% on investment properties?
I was too young foo 2008.
@Julia Jabronski Do MGM condos make any money? I had a pre-construction strip condo in 2008 I was going to flip, but I had to turn it into a rental. I sold it at a loss because of the dismal returns, and it was without a mortgage. When we moved here last year, I looked at living in a high rise and it was still a better deal to be a renter than an owner.
- Real Estate Agent · Scottsdale, AZ · Member since 2019 · 448 posts · 320 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?
Is that a 7 cap on current or (gulp) pro forma?
- Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes6y
My personal opinion of this "crisis" is that it will be much shorter lived than many people are dreading. The virus thing is going to be over within very few months one way or the other. The economic impact is directly related to the virus and actions taken to mitigate it. As soon as the storm is over, there will be pent up demand for many of the things that were not available. I don't think equating this to the 2008 financial meltdown is being realistic. I fully believe that we're in for a few really tough months financially but that things will be looking bright before the end of the year. My wife and I were looking at our rental portfolio this morning and doing some analysis on who is likely to pay rent (or not). We could survive two months with no rent and if we get half the rent, we could limp along for a long time.
I am happy to be only at about 30-40% leverage with many buildings owned in cash. My overall portfolio DSCR is probably around a 4.0.
But for everyone complaining about tenants potentially not being able to pay, "my mortgage is still due etc argument", Most banks are being very reasonable right now.I've been on the phone with multiple lenders. They are expecting us to pay our mortgages within reason. For a short term issue of 1 month, thats on you, you should have reserves. If this goes beyond 1-2 months, they all have told me they will at the minimum go IO. Forbearance is an option they are considering as well.
This is not a similar situation to the GFC. We are being forced to shutdown by the government in many areas. That is a very different thing than a recession for other reasons.
- Saint Joseph, MO · Member since 2018 · 401 posts · 244 votes6y
@Russell Brazil thanks for the sage words. I’m new to all this but luckily we have some reserves and luckily, about half of my 8 tenants get govt cheddar every month. I actually took a buyout and April 15 is my last day. Of course I signed the deal way before the sky fell, that was when only the sky at my work was falling. I have no choice but to make it through all of this. Luckily I am in the Guard, so if the going gets tough enough, I will just go overseas.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes6y
Originally posted by @William C.:
Can someone smart in the room define "over-leveraged". Is it based on LTV or ROI? Seriously trying to take inventory on my portfolio. We avoided a 100% financed fix and flip on narrowest of narrow margins in time for the crash. But, I have a few rental properties, eaxh leveraged at about 70% LTV pre corona. Each with net cash flow of $14,400/year. A class. I could afford to cut rents 40% until I would be cash flow negative. I haven't been concerned about the affects, but then again we don't know there the bottom is.
Were banks leveraging beyond 70-75% on investment properties?
I was too young foo 2008.
I don't know if I qualify as smart or not, but I personally would define overleveraged as not being able to maintain control of the property in the face of loss of income from that property. Notice I don't put a timeline on that. For me, short of apocalypse, I could hold all of my properties indefinitely if I lost all income from the properties because my total number of income streams and diversity of streams can absorb the costs of the properties and my living expenses. Someone else might define it differently - 1 year of lost income; 50 % reduction in rents; etc.
I bought virtually all of my properties for cash, and rehabbed them with cash. I have subsequently cashed out a few, but most of what I own is free and clear. I have four sources of income independent of the rentals that can cover all costs plus my living expenses, and reserves in stock (at least for now!).
Personally, I couldn't sleep if. I thought that losing rent would cause me to lose my investment. But I've been burner before.
Skyline Properties - Member since 2019 · 1k+ posts · 1k+ votes6y
@Will G.
7 cap today, what about in 60 days? I wouldn’t spend 5 more minutes on that one.
- 6yPeter TverdovBusiness MemberDeveloper · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
I've been saying this on here for 2 years. I have started threads on here asking people about reserves and got crickets.
I hope I don't get banned for tagging them but at what point do higher ups like @Josh Dorkin and @Brandon Turner share blame? You can't go one Instagram post, one podcast, one forum on anything Biggerpockets: BRRR! BRRR! BRRRR! Just BRRRR!
I submitted a video to be on their podcast and didn't get picked. Not really sour grapes but part of it (maybe?) was because I didn't brag about BRRRing to 100 doors. I own 10, boring but they cash flow (for right now) and I have reserves.
I see all these clowns on Instagram with houses the size of my car bragging about BRRRR and just take their online class and you can be successful too! These people are going to get absolutely annihilated in a few months. Majorleague bullcrap artists are all over the internet and suckers everywhere just handing them money. Blows my mind.
Biggerpockets created morale hazard promoting BRRRR so hard and I say it as someone who has done it to an extent, has reserves and I am still uneasy about it all. I cannot imagine the people who own a 105k SFH rental in a low income area and their credit card is the reserve.
- Flipper/Rehabber · Cleveland, OH · Member since 2014 · 173 posts · 121 votes6y
@Russell Brazil
Great words of wisdom.
I flip in sellers markets and BRRR in buyers markets.
@Russell Brazil
Sage advice Russel Brazil.
I d urge people to run scenarios on their personal finances, things like - what if they lost their jobs, had elevated vacancy rates on rentals, had to drop rents by 30 - 40%. This may be an academic exercise but will give comfort on how deep in the water you are in extreme situations.
Just spoke to a bud earlier, has multiple mortgages on properties in cheaper states as part of "buy OOS and BRRRR" world. I did not know but now I know he has highly leveraged his primary home here in the Bay Area to make it all work. His industry has started laying off already! Luckily no tenant issues yet but it might happen.
To me that’s precarious. I do think he will be ok but that is an example of how quickly things can shift.
- Rental Property Investor · Oakland, CA · Member since 2014 · 730 posts · 1k+ votes6y
Originally posted by @Peter Tverdov:
I've been saying this on here for 2 years. I have started threads on here asking people about reserves and got crickets.
I hope I don't get banned for tagging them but at what point do higher ups like @Josh Dorkin and @Brandon Turner share blame? You can't go one Instagram post, one podcast, one forum on anything Biggerpockets: BRRR! BRRR! BRRRR! Just BRRRR!
I submitted a video to be on their podcast and didn't get picked. Not really sour grapes but part of it (maybe?) was because I didn't brag about BRRRing to 100 doors. I own 10, boring but they cash flow (for right now) and I have reserves.
I see all these clowns on Instagram with houses the size of my car bragging about BRRRR and just take their online class and you can be successful too! These people are going to get absolutely annihilated in a few months. Majorleague bullcrap artists are all over the internet and suckers everywhere just handing them money. Blows my mind.
Biggerpockets created morale hazard promoting BRRRR so hard and I say it as someone who has done it to an extent, has reserves and I am still uneasy about it all. I cannot imagine the people who own a 105k SFH rental in a low income area and their credit card is the reserve.
Peter maybe I missed it but when did Brandon advocate for not keeping adequate reserves? He has been promoting BRRRR for sure but I think he's always advised to keep strong reserves in case of a downturn.
We BRRRR apartment buildings and refi to 70% of the ARV (banks are typically more conservative on apartments) and keep 6 months PITI reserves per property. I agree that there are many gurus out there that will likely get wiped out in a downturn but it's not fair to judge everyone who adds value or BRRRRs and assume they aren't planning for the worst.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes6y
Originally posted by @Michael Ablan:
@Russell Brazil - I pulled my flips off the market today and started the refinance process to get them off hard money. .
Ironic that right as requests to define overleveraged popped up, here came a sentence about refinancing flips to pay off hard money. Flips and STRs are a risky niche to have when the music stops. Hard money the riskiest loan type.
To me overleveraged can be the type of loan. Balloons, calls, HML deadlines , commercial loans, etc. Any is too many IMO. Same goes for seller financing where you don't own it. Too much risk.
The most leverage I would like to see is an 80% long term GSE loan on resi assets purchased at no higher than 90% of FMV. You'll have a value buffer and no PMI.
The 3.5% FHA paying retail househack threads should discuss buying below market value and having at least 3-6 months PITI in reserves. As portfolios rise into the dozens+, most I know just have an amount of reserves like 30-50k not including dry powder.
Good discussion. Stay diversified and know which asset classes and niches get hit first and hardest when people cut back. I think of non-essentials as icing, not the cake.
- San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes6y
I was managing 25 units in an apartment building in Santa Clara, CA when the crash happened in 2008. In one month, we had 25% of our tenants move out. They all left on good terms, so no evictions. They had lost their jobs - various industries. They moved in with family, most of them out of state.
Apartment buildings put out huge banners saying "No credit checks" "First month free" "No deposits."
We had to lower rents to get new tenants and only one of my current tenant asked for a rent reduction, which we gave them - we only used month to month agreements.
What ended up working for us, was the building was right next to the university. The owner hated renting to students, but after he told me to lower my criteria and we got a problem tenant we had to kick out - he let me try students. Undergrads are awful in a building with non-undergrads, so we ended up kicking a couple of those out. But, then I discovered law students - they're fantastic tenants.
But, students aren't affected by recessions. In fact, my friend who is in HR for a college district in the SF Bay Area, told me that more people go back to school during a recession. So, if you can buy near a college and focus on students, you're pretty recession-proof.
The owner I worked for owned that building and several others around the Bay Area free and clear with his brothers, but it was still a stressful time. We had to get creative looking for a different tenant pool, and fortunately had that option with the college next door.
My definition of being over-leveraged is not being able to weather a storm like these, because you don't have the reserves. I had a cousin back in the 90's doing the borrow on one property to buy another and so on, and he had a number of properties and when the economy started to tank, all it took was for him to have trouble with one property and they all fell like dominoes, one after the other. He ended up filing bankruptcy.
- Member since 2019 · 40 posts · 42 votes6y
@Merritt S. 100% agree with this. I’ve been told many times that I’m leaving a lot on the table by not constantly leveraging. The most attractive way of re investing for me is save buy save buy and once you get a couple of doors the saving starts happening pretty quick. It’s always made more financial sense to me to have a few full cash flowing properties before you use leverage to greatly greatly reduce your risk. I won’t let the bank own my fate. No doubt brrrr and other creative financing options can grow your portfolio faster but your chances of getting bit are much higher.
"I was too young for 2008.
William C., Real Estate Agent"
Kids !!
During the '80's I was heavily invested in REI ONLY. 90-100% leveraged @ 18% interest rates (all owner holds), then '87 Black Monday hit everyone invested in equities. Intense Frugality, a life saving expense account & maxed out credit cards were the norm. But I survived by renting every room in every home to colleagues working on a huge commissioning job. As the crunch came I had to sell some (& they had appreciated significantly) or a % share of others to get comfortably solvent. But that 'survival' strategy hit me with a "what the hell" $18k capital gains tax. It was then I learned all about IRS wage garnishments, thank God for unlimited overtime.
By '98 I was retired, free & clear & still kick myself for selling some of those old classics.
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes6y
This crisis will eventually be over , it will separate the men from the boys .
Join the conversationCreate a free account to reply, vote on answers and follow this thread.