Scaling Without Overleveraging — What’s Your Approach?

Question

As portfolios grow, managing leverage becomes critical. How are investors balancing growth while staying conservative enough to sleep at night?

Dan H. · Answer

High leverage does not equate to over leverage.   I strive for highest leverage as possible.

High leverage typically produces highest return.  Highest return should be the goal.

Lower LTV to achieve cash flow is paying for the cash flow upfront and greatly reduces the return. Underwriting in virtually every market will show increased down to purchase the cash flow is a bad investment that will impact the property's return for the life of the loan.

How do you have high leverage without over leverage? Diversity is a fundamental component. The more diversified you are, the lower the risk. My DTI is crazy high, but I can handle virtually every worse case scenario.

Scaling comes down to making good investments.   Nothing will allow scaling faster than producing high returns.   Brrrr at the theoretical infinite return.   High leverage produces better return than low leverage.  The corollary is lower leverage will hinder scaling.

Good luck

David Krulac · Answer

I sleep fine at night even when I had 50 mortgages and writing those monthly checks was my biggest expense.  Other than those 50 mortgages I had no other debt, no car loans despite having multiple cars, no credit car debt, that wasn't paid off every month and no student debt. All the debt was being paid by tenants, and I appreciate them doing so.

Bo Smith · Answer

The sweet spot I've found is keeping total debt service under 60% of gross rents across the whole portfolio, not just individual deals. That buffer saved me when three units went vacant at once last year. Plus tracking your liquidity ratio - cash + credit lines divided by monthly expenses. What's your rule of thumb for cash reserves per door?

Joe Villeneuve · Answer

Flip...or train your grandchildren.  Partner, but that means sharing returns, which isn't that bad.

Allan C. · Answer

Depends what scenario you want to be prepared for. Many will suggest keeping 2 months reserves, but i think that only buys you breathing room for normal operations.

if you want to weather a storm, like sustained market downturn, then you'll want 6-12 months reserves. You can also open a HELOC that you only use for emergency situations.

James Mc Ree · Answer

Hold strong reserves to cover the unexpected, preferably 2 unexpected in the same month!

Perform a sensitivity analysis. How many properties can you afford to go vacant? Suppose that happens when you have unexpected issues? See what that looks like in your cash flow and reserves. Are you comfortable with it? If so, scaling more is fine. If not, you might already be out over your skis and not realize it.

Try to get ahead of some maintenance items. For example, that 20 year old water heater isn't going to last forever. Do you want to decide when to replace it or do you want it to decide? Proactive maintenance does mean you replace items before absolutely necessary and allows you to move from, "I sure how A and B don't fail at the same (they will!)..." It also gives your tenants a better experience.

Ethan Haigler · Answer

@Tracy Thielman I continue to adjust actual average cost to maintain my properties and the expectations when thinking about buying another. I am also deciding in some cases with BRRRRs not to take the full cash-out refi amounts. I make sure rental income (or expected income) will full coverage mortgage cost and a healthy layer of expected costs.

Scaling Without Overleveraging — What’s Your Approach?

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