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
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes6y
Originally posted by @Heath Jones:
@Russell Brazil
If you have a property rented, no intention of selling for another 15 years or more, and have a proper amount of reserves, is being over leveraged really a concern?
Leveraged with what types of loans?
Commercial and some blanket loans make you report your financials to them every year. Then every 5 years they review to decide if they want to call your loan or not. A committee decides, taking their own health and appetite for risk into account.
Helocs and other lines of credit can be frozen or called at any time . Period.
Private, seller-financed and hard money loans can have balloons or different deadlines. They expire. Land Contracts can have same and you don't even own the asset until paid off.
Unless you have the reserves to pay these types of loans off completely, over leverage should be a concern I would think.
This is just the beginning of a longer period real estate sell off. Things always get worst before they get better .. IE : Most Lending programs offering the Non traditional loans with no docs or limited docs just got put on hold . My firm has informed us nothing new aloud at this time . Anything in the pipeline should close but nothing new in the door .
This event will put great pressure on the RE markets as lenders & banks evaluate how to contain risks from a likely recession . That sucks for me as lender but anyone with Good docs and credit will still qualify for loans, others with records not as pristine will have to find higher priced private money or stand on the sidelines or figure out if tenants stop paying rent if they qualify for any program .
I have a feeling many Hard Money lenders will need to start foreclosing on their money thats out on the street for months to come. If the many flippers cant finish a project or flip for profit -- HM lenders will try to unload properties once they foreclose and put additional strain in the marketplace.. Think of Dominos tiles --and not the pizza shop
- Real Estate Broker · Watertown, NY · Member since 2016 · 1k+ posts · 1k+ votes6y
@Damian Smith - My area is driven by the military moving in or out. The pentagon put a ban on all PSCing which effectively stops all of that activity in its tracks.
I'm also in New York, which is a state that's leading the way in proactive quarantining action. The current idea is a forced quarantine lasting 2-4 weeks.
At this point, I'm more concerned about my investors money than the profit I might make if these miraculously sell given the current circumstances.
Live to fight another day.
- Developer · Marlton, NJ · Member since 2019 · 44 posts · 8 votes6y
Hey Mike
I know its a trying time each decision now requires careful thought. Hope it works out for you and me both. Thanks
- Oakland, CA · Member since 2020 · 11 posts · 2 votes6y
@Julia Jabronski
This is so right on. I’ve been reading these forums for the past year and occasionally listening to the BP podcasts and scratching my head. These jokers are really just Instagram “influencers” hawking poorly written books and seminars - they don’t know what they’re doing. And half the people they have on their show are the exact same - “personalities” interested in the show biz side of it. Embarrassing
- 6yKiersten VogtPro MemberReal Estate Agent · Ocean View, NJ · Member since 2015 · 76 posts · 25 votes
I remember comparing my real estate investing parents to my friends non-real estate investing parents during the 2008 recession and wondering why there weren't freaking out like everyone else was. They had about 30 units and knew if they held on through the tough times they would make it out okay. They had savings, they had a variety of tenants (some who were affected some who weren't, some were on section 8,) and they weren't over leveraged.
I agree with @Joe Splitrock I've learned FROM BiggerPockets that I needed to have cash in reserves to safely invest in real estate. If newbies like myself actually pay attention to everything being taught here on the forums, the podcast and the books, you'll see they don't sugar coat the fact that in order to be successful in real estate you need savings. I think people just like to skim over that part and focus on the pot of gold at the end. Just because you can purchase real estate with no and low money down doesn't mean you should have no money saved.
- Tampa, FL · Member since 2017 · 63 posts · 28 votes6y
Originally posted by @JD Martin:
Originally posted by @Russell Brazil:
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.
I'm glad to read this from someone with experience. I've been looking for my first investment property for about six months in Tampa and it's a challenge because everything is overpriced for my criteria. I have read a lot about the brrrr strategy on this forum since I joined over a year ago. I understand using debt to leverage growth, but at the same time I root for the tortoise when he races the hare. My compromise is to use the brrrr strategy but only leverage up to 60% of the property. I would rather take out a smaller amount of equity and grow my portfolio as opposed to leveraging up to 80% and having to deal with higher mortgages and a looming recession.
Again, I have yet to actually buy my first investment property, but I'm relieved to see my planned approach used successfully by an experienced investor.
- Real Estate Agent · Pittsburgh, PA · Member since 2015 · 1k+ posts · 846 votes6y
@Russell Brazil great advice. We have a few private investors out there that lend to us and one thing that we did was to make sure that we had a plan to pay out whoever may want/need their money out early.
We contacted a few of our major private lenders and asked what their plan was and a couple actually said that they would purchase the debt of any other investors if they want out. We return consistent payments so the smart ones know that they are getting better return than the stock market will for some time. However, by creating this option we can help out our investors that want out, continue to generate passive income for the ones that want to stay in, and prevent us needing to pay someone out through our own pocket (though the agreement does have provisions for that, we would prefer not to lock people in if they are in crisis mode).
Was more concerned with a lot of people needing to pull out money at once than I was with short term making payments. Short term I'd urge everyone to assess their own cash position and take a look at their tenant's employment. We have already started proactively talking to the tenants about some of their options and the ones that have reached out I have been trying to connect them with some jobs that may still be available (work from home data entry, virtual type jobs in health care, delivery drivers, etc.)
It's going to be a rough few months I'll say that. - Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes6y
Originally posted by @Account Closed:
@Julia Jabronski
This is so right on. I’ve been reading these forums for the past year and occasionally listening to the BP podcasts and scratching my head. These jokers are really just Instagram “influencers” hawking poorly written books and seminars - they don’t know what they’re doing. And half the people they have on their show are the exact same - “personalities” interested in the show biz side of it. Embarrassing
Hmmm...which books did you read that you thought were poorly written? I would definitely want to either avoid those or check them out myself to see what I thought. If you can name some of them, what didn't you like about them?
Skyline Properties - Real Estate Broker · Northeast PA · Member since 2017 · 2k+ posts · 2k+ votes6y
The title of the original post is "Be careful if you are overleveraged."
Sorry guys, the time to be careful is when making the decision NOT to be overleveraged in the first place. Just sayin...
- 6yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Daniel B.:
@Peter T.
From the early days of BP they have warned against what they have called the “gurus”, warning members against paying high fees to get sold promises of get rich quick schemes. This is what drew me to BP 8+ years ago. Not sure why you would reference the “Instagram clowns” in relation to BP?
Back in the day @JScott posted the Atlanta fix and flips he was doing with numbers for each property, lessons learned, transparent on mistakes made, etc. Fast forward to today and he recently did a business podcast talking about how he wanted to start a new business that had to be recession proof (because one was coming) and has done podcasts specifically on how to prepare for a recession, specifically stating “move to cash” aka “reserves”.
Even doing a BRRRR requires a bank ordered appraisal and with cash out you can only do 70-75%LTV. Banks require months of reserves for all properties you own, so this is all built in as a minimum in order to even do a BRRRR.
Your criticism of BP is somewhat unfair. Should they have stopped teaching people about BRRRR as they simultaneously warn about cash flow, reserves, etc? @Scott Trench's first book was basically about being as financial responsible as you can in life...riding a bike to work over spending money on a car and house hacking so you have no housing payment.
Keep in mind BRRR is not a new thing was NOT invented on BP or by the folks who promote the strategy on BP.. before BP was born I was doing a few hundred BRRRs per year as a HML thats how west coast buyers bought rentals back in the day.. that was how turnkey worked pre 08. there is nothing novel or new about BRRR that has not already been done for decades.. it was just a coined term that newbies glomed on to so that they could scale faster.. So lets keep that in perspective.. BRRR was not invented here they just coined a clever moniker. we called it cash out refi LOL.. in the olden days.
@Jay Hinrichs
I understand. I don't have nearly the experience you do, but bought my first property in 08 and did cash out refis before it was a BRRRR.
My post was in response to if BP is responsible for people making poor financial choices/over leveraging. I don’t think they have, I have seen balance from those who work for BP - although
Anyone can post anything. If a thousand people read the same posts about BRRRR and other posts/podcasts advising caution, some will be aggressive and some more cautious- different personalities and life experiences.
To be a doctor or lawyer you don’t just need to understand how medicine and law work, you have to learn an entire terminology to go along with it. BP made real estate concepts simpler, and offered it for free for the average person (sorry - still not a pro member).
- Rental Property Investor · MI · Member since 2018 · 17 posts · 8 votes6y
@Russell Brazil
The 1st thing I tell people when I'm asked questions about my realestate Investing is that if you cant pay cash for your investment property, then your taking high risk and only making the banks richer @ your Cost..
If your going to invest in realestate, buy cheaper homes that you can pay off quick if you have a loan on it.
Crawl before you Walk and you will succeed in realestate !
The key to my success is buy, hold Rent and no loans longer then 5 years if needed..
- Lender · Member since 2019 · 47 posts · 97 votes6y
From my position and I think many others position, I was kind of enjoying the good housing market and was a little naive to my expenses. We are not over leveraged right now but the market shift happened overnight in my opinion. I still however have a property for sale, one sold (closing next week) and one currently being rehabbed. This was definitely an eye opener for me and will always maintain my 6 month cushion in my nest egg.
I don't think the real estate market knows whats about to happen to it. Commercial lenders are killing deals already. I'm selling a strip center and they asked for 90 day extension. My agent lost two large deals in last 48 hours. I think the residential market is stalling and will be in free fall shortly. Almost impossible to imagine this scenario 15 days ago. My last flip just went under contract today but I won't be surprised if it doesn't close. Good luck to everybody.
- Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes6y
@Russell Brazil
Good advice. Many landlords will have a revenue hit. Things get ugly when an overleveraged property has expenses exceed revenue.
My workforce housing might be the riskiest category. Lots of tenants have service jobs, in industries that have shut down.
I have a portfolio of low income, section 8 housing. I actually thrive in this asset class. And it seems to be somewhat recession proof. I think tenants will also move LESS during this outbreak.
My better properties have tenants that have more reserves and resources. The tenant class is less risky.
Small urban commercial buildings, which only have a small amount, are highly risky. If you have a restaurant, the tenant will come to you for rent abatement.
Developers / rehabbers / flippers are facing some tough times if demand sharply declines. The market has softened. And they have loans and no revenue coming in like a rental building.
- Rental Property Investor · Philadelphia, PA · Member since 2015 · 95 posts · 53 votes6y
Thanks @Russell Brazil is post is about 3 years too late. I feel bad for the newbie investors here that have been bombarded with messages the BRRRR method over and over on the podcast and forum. No one ever talks about the potential for something like this happening, but just to refinance, leverage, and repete. BiggerPockets should have been incorporating more economists in the podcasts. Marco Economists isn't sexy but it is apart of the game. The Real Estate Guys have warning about this day of recking for years. We're just hearing about it now on BP.
- 6yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Brian Ploszay:
@Russell Brazil
Good advice. Many landlords will have a revenue hit. Things get ugly when an overleveraged property has expenses exceed revenue.
My workforce housing might be the riskiest category. Lots of tenants have service jobs, in industries that have shut down.
I have a portfolio of low income, section 8 housing. I actually thrive in this asset class. And it seems to be somewhat recession proof. I think tenants will also move LESS during this outbreak.
My better properties have tenants that have more reserves and resources. The tenant class is less risky.
Small urban commercial buildings, which only have a small amount, are highly risky. If you have a restaurant, the tenant will come to you for rent abatement.
Developers / rehabbers / flippers are facing some tough times if demand sharply declines. The market has softened. And they have loans and no revenue coming in like a rental building.
agreed on small commercial and strip centers.. I went to walgreens yesterday and the entire strip center was closed only thing operating was walgreens which is deemed essential.. now here in Vegas it was a 30 day closing.. so we are one week into it. But realistically most if not all business's should be able to have one months of operating reserves if this continues on then all bets are off.. it reminds me of 09 when many strip centers were 70 to 80% dark.
- Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes6y
Originally posted by @Jay Hinrichs:
@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.
65 is absolutely the new 45 and you'll be just fine - I suggest a healthy diet!
I want to thank you for being vocal to this community concerning what the best move for landlords is in times like these. As usual, you were on the mark and ahead of the curve. Maybe we differ on how to handle an outbreak, but not so on what to do after. I started a new thread that skips the financial discussion and gets to the morality of it all, seeing as timing can be crucial. I think the time to mull it all over is past. Be well.
- Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes6y
@Jay Hinrichs the concept of businesses having only one month of operating reserves blows my mind. Call me conservative, but in peak times looking over the cliff, the businesses that really make it out have big cash piles.
Nonetheless, I know here in CA even the small businesses that can afford to pay their landlords will not. The moratorium on evictions applies and businesses are writing letters to landlords saying "extend my lease bc I'm not paying". Landlords are writing letters to their mortgagors. And their utilities companies.Of course, the cost of all this will be redistributed through the system when things are good again. Ha.
- Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes6y
Originally posted by @Russell Brazil:
Im not saying this to say hay, Im right, and everyone else is wrong, whch is true btw lol
LOL!
Join the conversationCreate a free account to reply, vote on answers and follow this thread.