Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
10y
The absolute debt doesnt matter. What matters is debt/equity ratio, debt/income ratio and reserves. If you have a high income and lots of reserve with properties that have a lot of equity, the absolute number of the debt is irrelevant
Investor · Bryan, TX · Member since 2016 · 165 posts · 82 votes
10y
thanks @Joe Splitrock I read that definition but was wondering if it had a specific meaning in the the rei world like cash out loan, or saved up cash or something along those lines. I guess it just has the broad meaning.
Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
10y
I'm at about 1.2M in debt, but it's all mortgage debt. GI bill paid my education, I pay my credit cards each month, and I bought my (cheap) truck cash. I'd love to double that amount, but unfortunately since I quit my W-2 job financing is getting a little harder.
To those who say that you should be concerned about a potential crash, I argue that you should just make sure that you only buy if you can add value. If my total rental income goes down by 50%, I can still take care of my mortgages, taxes, insurance, and maintenance. If it goes down a bit more, I may need to defer some of the less needed maintenance. If the world goes insane and suddenly I can only get 25% of what I get now, I might consider getting a "real" job again.
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
10y
Debt does represent risk so yes, I am concerned at some point. But debt does not stay still. It gets paid down every single month with mortgage payments. I have relatively high debt because I own high value property in an expensive area. But also have a large amount of equity. I am also fortunate to have a good income to support mortgage payments even if there were not tenants (which in my area is extremely low probability) and if I could not, I could sell quickly in a market with high liquidity and sufficient equity. So thats how I manage the risk of the debt. For out of state investments, the numbers are much much smaller and risk is spread out over numerous homes, so dont expect all to be empty at the same time!
If you don't mind.. Do you and your Spouse have high-income jobs aside from investing?
We own & work together in a business. "High-income" is a subjective term. We are rather frugal, and live in a low expense area, so we don't need as high of an income to live well. We make more now than we ever have, so it feels high to us, but we are (barely) in the 25% income tax bracket.
Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
10y
Thanks @Perry Ivy. There's actually a lot more to the whole equation, and it's been talked to death, but let me quickly illustrate a few more advantages to mortgage debt.
- it's deductible on your taxes, provided you itemize (which every real estate investor should)
- you're borrowing in today's dollars, but paying in future dollars; inflation over time for the USD tends to hover around 2% per year (Fed's goal, although at the moment it's slightly less), and mortgages right now are well below 4%, thus really meaning that you end up with only a <2% cost year on year, all else being equal
- the cash you haven't spent on your property can go to other places, such as more real estate, the stock market (historical long-term yields of 7.5%), or giant billboards with you making a silly face on them (yield: priceless)
All that being said, make sure you have a bit of a buffer and a few exit strategies. I'm actually a relatively conservative investor, and I constantly worry about all kinds of scenarios, but if you do the numbers right more debt is a good thing.
Investor · Jonesboro, AR · Member since 2015 · 241 posts · 132 votes
10y
Sylvia B. Kudos to you for your sacrificing. I too am conservative. I live in a 600sq foot burned out shed that I remodeled and added on to, it is on some of my rental property. I can turn of the water and electric and travel. The mortgage is paid by my tenant and my money goes toward investments :)
Investor · Jonesboro, AR · Member since 2015 · 241 posts · 132 votes
10y
Jacob Pereira thanks again, the illustrations really help! I hadn't considered some of the angles. I've owned real estate for a long time, but not to this scale and so I need the missing pieces :)
Russell Brazil kudos to you, your very brave and I hope it turns out good for you. I personally don't have the risk tolerance :)
Mine is at 430k. Mortgage one 1 duplex. I'm in the same boat as Russell, I'm trying to take on as much as I possibly can. Why? Because I analyze my deals so they cash flow right off the bat even with the debt, capex, vacancy, etc. I think of it as another operating expense. You wont dig a well to supply your property with water if it's already available at a reasonable cost. Plus with debt, it raises your cash-on-cash return tremendously. In my opinion, the worse case scenario is I sell it for the same price I purchased it. Even if I did, I would have made a profit from the principle recapture which is ~1.8% "cash back" on your financed property at least for the first year. I guess what i'm saying is; instead of spending years accumulating cash for a purchase in order to avoid debt, it is probably better to spend a lot less time and money to create a cash flow stream earlier.
Additionally, you face the same perils where you use debt or cash. But if you lose with your and your investors' cash there is no way out of that hole. With debt there may be a chance (dirty process but a chance nevertheless).
Investor · Jonesboro, AR · Member since 2015 · 241 posts · 132 votes
10y
Shital Thakkar thanks for illustration. I agree. I have purchased a property that's worth approximately 3million and I have about $100k in it. I have been considering my original question due to the risk of loosing this property, as well as the others. Most of my properties are in a Corp, but I've had to personally guarantee them and I don't want to over leverage
Investor · Jonesboro, AR · Member since 2015 · 241 posts · 132 votes
10y
Ty Monroe you need to read and read the advise that I was just given, a very intelligent and knowledgable group. Time and experience is what separates all of us.
Asheboro, NC · Member since 2016 · 31 posts · 16 votes
10y
Is it better to own a few houses free and clear if you have say 10 houses or should you spread that debt (and equity) over the 10 properties?? What do lenders look for??
Investor · Jonesboro, AR · Member since 2015 · 241 posts · 132 votes
10y
Joe Baker it's my opinion that there's no cookie cutter answer to your question, as each banker is different. With that said, the most important attribute you can have is likability. When I was 15 I walked into a bank and received my first loan and have continued to repeat that ever since. The easiest part of real estate is the banking part. Most people don't spend the time to build a proper relationship with the right people in the banking industry, tellers, secretaries, assistants, ect... I always go in for all of my transactions(no drive threw) and when things get messed up I never gripe at the tellers. Bankers are for the most part figures. Behind every successful man is a woman rolling her eyes. She's rolling them because she's doing all the work. Find that woman, appreciate her and the world will be yours. I have three banks that I use and it's the same in every bank. I could ramble on, but there's much greater experience and wisdom on this thread.
We have really started aggressively acquiring properties in the last three years. We have managed to reach 17 properties in three years. But we have also seen our debt soar. We are at about $700,000 in debt among banks and private lenders. The good news is that we have over a million dollars in property, so our equity is about $300,000. We also should have really healthy cash flow once all the properties come online. Our focus between now and the end of the year is to build 6 months of mortgage payments in cash reserves and to refinance to get some of our payments down.
Investor, engineer · Longmont, CO · Member since 2013 · 55 posts · 36 votes
10y
I have about $750K debt on 1.1M equity in three houses, including my personal one. My two rentals cash flow and I am not very concerned about not being able to make mortgage payments. In order to really get in trouble I think the economy would have to tank worse than last time, and I would have to loose my job and not be able to find ANY work for an extended period of time. And if that happens, I would be screwed even if I didn't own rentals. Overall, having the debt, plus the cash flowing rentals makes me more secure not less I think.
Real Estate Investor · Rancho Santa Fe , CA · Member since 2016 · 323 posts · 107 votes
10y
I have Company debt about 75 units and personal debts 5 SFR, 7 Condos ,4 commercial buildings and building 17 track homes so I have construction loan debt. lets saw I passed Russell by good sum.
1) I am not scared ill borrow till they stop giving me
2) all of my properties cash flow
3) I don't have a salary
4) yeah I might be crazy, let just say when I was 21 this was before the big crash my debt to income was about 70% but I build a lot of good equity and thankfully I sold a lot before it crash and rebought double during the crash. now I try to add 35 units to my multifamily portfolio yearly and try to put the less amount of my cash down.
Real Estate Investor · Rancho Santa Fe , CA · Member since 2016 · 323 posts · 107 votes
10y
I have Company debt about 75 units and personal debts 5 SFR, 7 Condos ,4 commercial buildings and building 17 track homes so I have construction loan debt. lets saw I passed Russell by good sum.
1) I am not scared ill borrow till they stop giving me
2) all of my properties cash flow
3) I don't have a salary
4) yeah I might be crazy, let just say when I was 21 this was before the big crash my debt to income was about 70% but I build a lot of good equity and thankfully I sold a lot before it crash and rebought double during the crash. now I try to add 35 units to my multifamily portfolio yearly and try to put the less amount of my cash down.