Spec Builder Leverage - where’s the sweet spot

[Daniel Hayes]

I’m relatively new in this game and have started contemplating growth and what that may require regarding leverage/risk.  

I focus exclusively on remodels and new spec builds in the~Nashville area.

2 questions I have:

1) Am I calculating my leverage appropriately?

2) Is there a rule-of-thumb for a conservative vs risky leverage profile for spec builders?

Here are my current numbers I’m working with (13 projects):

-Projected value of existing projects: $8,900,00 (estimating based off ~15% price reduction from market peak)

-Existing debt (including HELOC): $3,372,000

-Estimated building / rehab costs to complete existing projects: $2,550,000

Total Leverage on existing projects: (3,372 + 2,550) / 8,900 =  66.5%

My gut tells me I’d probably rather live around 50-60% leverage, but scaling obviously becomes difficult without increased leverage. 

(These numbers don’t include other investments (index funds) I hold, but RE makes up ~70% of my net worth.)

Thank you in advance for any opinions/advice!!