How much leverage are you comfortable with?

Question

Hello Bp community,

Do you have any general investment principles for determining how much leverage is enough leverage? I’m pushing up against my max DTI and with tighter lending restrictions, lenders will be a little nervous if I continue to buy properties. It has made me wonder whether I ought to pay off (or pay down or recast) some of my properties. I’m aware there are multiple strategies to get more cash if needed but also aware there are risks to being over-leveraged. Curious to hear your thoughts, thanks!

Rich Weese · Answer

@Daniel Z Fang

I started investing in real estate nearly 50 years ago. One dollar was a lot more back then! I remember my first real estate broker telling me his goal was to become $1 million in debt. I was very young and thought that was a little weird. Understanding that became very easy as I began to purchase real estate.

I think you look at leverage differently based on your age, reserves and goals. Mine have changed tremendously over the decades.

The broker who wanted to become $1 million in debt had a very simple strategy. If he was able to get financing on that much debt and make the monthly payments to service the debt, and inflation was 6 to 8% annually, he would be making $60,000-$80,000 on paper each year. Those numbers represented a lot of money 50 years ago and I decided that was a great plan.

The numbers grew exponentially and allowed me to retire at a very young age. I have changed my methods of purchasing and owning real estate on a continual basis. It is now on autopilot unless I decide to take some chips off the table every few years.

Pick a plan, make it work and time will most likely give you the results you are looking for.

Good luck.

Nick Rutkowski · Answer

@Daniel Z Fang

I can do 80%-100% depending on my deal structure coming in. It comes out to 80% after my exit strategy. My last deal I was able to come to the closing table just paying closing costs. But I do some out of the box funky things.

Have you looked into commercial? Lenders look at the income of the property before your personal finances. Could be a way to keep going.