Investor 路 Singapore 路 Member since 2013 路 1k+ posts 路 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
Real Estate Broker 路 CA 路 Member since 2016 路 243 posts 路 226 votes
9y
There is no simple answer. But real estate is best with debt when acquired intelligently. I wouldn't worry about the actual number but more about the quality of the loans and the assets that secure said debt. Generally speaking I want as much debt as I can get as long as it has terms I want against properties I deem worthy. I try to be at 70 ltv but that is hard in a strong market and the portfolio is now at 52. As others have said you have to model for downturns and the unexpected. If you can handle that, borrow more and as long as you do it intelligently. Basically it is like monopoly: You want to buy and improve as much as you can as long as you can handle landing on the other guys Boardwalk with a hotel once or twice.
Investor 路 Cottonwood, AZ 路 Member since 2015 路 287 posts 路 57 votes
9y
$165,000 with 2 mortgages on my own home. Value of the home is $160,000. Victim of predatory lending and stupidity. Desperately trying to pay them off, I have 3 falling apart rentals that could pay off the mortgages but they need so much repair the repair costs are taking up every cent I can muster. Could use guidance. Head is above water but just barely, and Im standing on a slippery rock under a strong current. I used to be in good shape but I was ignorant and blew it all, not on stuff, but on bad investing. Floundering. Frighetend. Sad.
Investor 路 Jonesboro, AR 路 Member since 2015 路 241 posts 路 132 votes
9y
Matt Hoyt good advice and great analogy, I learned a lot from playing monopoly :)
Brenda Whittaker I'm sorry that your dealing with the downside of investing. If I can be of service, let me know.
Investor 路 Mason, OH 路 Member since 2016 路 61 posts 路 19 votes
9y
I own 8 SFR including my own house with 0 debt. All my rentals cash flow pretty good due to lack of mortgage payments. My philosophy is if I can pay cash for properties then I will get them if not I will wait. Taking a lot of debt in my opinion is a big risk even though you can grow your business quicker than waiting to buy with cash. I know every one situation is different but that is my investment philosophy
Investor 路 Warner Robins, GA 路 Member since 2015 路 1k+ posts 路 490 votes
9y
Just bought my first property last month. I'm 21, $132k in RE debt. Also have a personal loan on the side of 6k cash in case I need it. 1k credit card.
Malden, MA 路 Member since 2016 路 112 posts 路 63 votes
9y
Debt free as of this past pay period! Over 50k paid over the last year and half! Nearly all of my paycheck went towards it!
Hopefully I'll be in that "good debt" realm soon with my first multi-family!
Investor 路 Orlando, FL 路 Member since 2016 路 5 posts 路 10 votes
9y
Debt is a double edged sword. Its a great tool as long as you have the ability to take it off / support it when needed. I started RE investing around 2002 and made a lot on the way up and gave about 1/2 of it back after the top. After first hand experience (which you can't learn from books) of rents going from $8800 per month to $4200 (example of one commercial property), my views on debt have changed. I've always had self employment income from another source so it wasn't a big issue but the emotional hit of having great cash-flow properties going to a negative cash-flow (and cycling tenants) really pissed me off lol. My debt today (approx 1.3m) is about 1/2 what it was at the peak and I added multiple properties since in 2012, 2013 & 2014. So overall my debt/equity has been substantially reduced and on the way to zero.
Currently in Central Florida the commercial / industrial market has already exceeded investor opportunities and most properties are trading ABOVE replacement cost... At the trough in the market you could find deals at about 50% of replacement cost which typically works even in a down market. At least in this area its no time for investors (that want a decent return). NOW when analyzing a property, I try to determine where rents would be in a severely stressed market (with above average vacancy) and run the numbers to see if it works. Lately that has not happened, but it will again in the future just like every other RE cycle.
The last 2 years my focus has been on aggressively paying off everything and getting prepared for the next pull back with no debt and a heavy cashflow.
A few quotes I like (Buffet I think) that keep me in check:
"Its hard to go broke without leverage" and "There are two types of people lose money: those who know nothing and those who know everything"
Investor 路 Jonesboro, AR 路 Member since 2015 路 241 posts 路 132 votes
9y
Eric Inman thank you sir for sharing your vast knowledge and experience. Your take on the coming bubble is interesting. I too am seeing the same in my market. Thanks again for sharing :)
Investor 路 Ocala, FL 路 Member since 2016 路 299 posts 路 110 votes
9y
I used the equity in my home to buy SFR's that were pretty ugly and needed mostly cosmetic work and upgrades. My mother had a lot of SFR's for years and taught me the lower end rentals are always in demand so the least rent I get is $650 and the average is $800 per month and I paid between $22,000 and $55,000 for the properties. I try to go in and improve a few things whenever I have a vacancy (usually tenants stay at least 2 - 4 years). On the downside, Bank of America called a year ago to ask if I understood my 25 year equity loan (which had payments of about $600 a month on $250K) - turned out it was 10 years draw and then no more draw and 15 years of only payments (now about $2050 a month). I had really screwed up holding a couple of mortgages with only $5,000 down and the deadbeats proceeded to stay and not pay, so no income and added attorney fees and court costs - to say nothing of them trashing both places and stealing the appliances by the time I got them back in my name. BIG MISTAKE - no more mortgages for me! I did hear lease option is a good way to go, with about 10% down and option for 2 years with buyer to find their own financing, but I haven't tried it yet. I paid cash for all my SFR's using either my equity when I could draw on it, or using the money I got from selling some raw land that wasn't producing income and one of the repo houses. I have one SFR that I have depreciated a lot that I am thinking of selling and buying other houses to rehab. It's getting harder to find bargains since there are lots of cash investors and groups of investors jumping on listings and advertising for houses. All my income is from rental properties now, so the banks here are not wanting to loan to someone like me unless they charge a lot of fees and they want about 6% for 15 years. I can borrow a lot cheaper on my credit cards when they send promos and do almost all my repair/rehab material purchases on 0% interest promos. All other credit cards are paid in full every month. I would love to find a decent interest loan on my paid in full rentals to leverage into more rental properties.
Rental Property Investor 路 Olympia, WA 路 Member since 2014 路 777 posts 路 744 votes
9y
@Perry Ivy. interesting question and you've gotten some great responses.
Knowledge, experience and goals all make people choose differently. I currently have 86 units, so my debt is larger than average. But more importantly, my net worth is almost equal to my debt! I'm currently at about 55% LTV, so I am very comfortable with that (during the last downturn, we used all excess cash-flow to pay off all secondary financing helping to achieve a low ltv and now greater cash flow).
My UNITS are diversified (sfr, duplex, 10-42 unit apartments, and mixed-use commercial), and our REGION has broad economic diversity. So if one industry lags, the others still perform. We are the state capital (I don't expect gov't to shrink any time soon), have a major military installment close by (Joint base Lewis-McChord), we have a port, timber, electronics, Amazon distribution center, etc...
I like leverage. I have often bought with 100% financing. But saw my way to both increased equity and cash flow. My last purchase was a 10 unit for $389k. I used a line of credit for a 20% down payment and commercial financing for the other 80%. HOWEVER... it appraised for $450k at purchase. AND rents were WAY below market. I spent $60k on much needed improvements, raised rents by 30% and just got a new appraisal at $750K 10 months later! Leverage worked well here! To finish the Brrrr, I will take out about $130k of that to prepare for the next opportunity that comes along. I will still have very comfortable cash flow after all expenses to make the property very worthwhile operating at aprox 70% ltv, and total expenses of 45% of gross income.
Investor 路 Jonesboro, AR 路 Member since 2015 路 241 posts 路 132 votes
9y
Marelyn Valdes thanks for sharing, you have given me food for thought.
Curtis Bidwell wow! You have some impressive things going on. You have a well thought out plan and your doing a good job of executing it. I can tell that you really know your craft. Thanks for sharing.,
Investor 路 Tulare, CA 路 Member since 2014 路 34 posts 路 23 votes
9y
I have approximately 450k in debt right now. Just purchased my first investment property, a 2-flat in Chicago and own my primary residence with about 50% LTV. Looking to obtain more debt if the deal is right. Something I really enjoy about utilizing debt with real estate is because you are purchasing an asset depreciation becomes a greater benefit the more you are able to leverage yourself.
Investor 路 Thermopolis, WY 路 Member since 2012 路 4k+ posts 路 4k+ votes
9y
@Perry Ivy, and @Steve Vaughan, thanks for the kind words. Let me add part of the strategy I use in investing as it applies to debt. All of my personal property like my home, office, horse corrals, and some other lands I purchased 25 or 30 years ago are paid off in full with no debt. I pay all my credit cards off every month, and I owe no personal debt like cars, boats, etc. All of the real estate properties are owned by my wife and I as Tenants by the Entireties. This is a special form of ownership where a creditor cannot attach the property unless both parties owe the debt because both own the property entirely. This form of ownership is only available to a married couple. If one of you declare bankruptcy the the federal courts have ruled the property is exempt from bankruptcy attachment. Now all of my rental units are owned only by me personally, or in a company I am the only shareholder in. My wife does not sign for loans, and is not liable for them. If the worst happened and I got sued for ten million and lost, or if I lost everything to foreclosure and all of my rentals, all of the property owned by my wife and myself jointly would be exempt from bankruptcy proceedings. I have also accelerated my retirement investing and hope to have about 2 years of wages in a self directed investment retirement account. Nearly all certified retirement accounts are also exempt from attachment and bankruptcies. Now some debts are considered jointly owed by both spouses, like medical care, and most life necessities, since spouses are supposed to take care of each other. Now transfers to family members, even spouses can be undone by bankruptcy trustees for up to one year and sometimes 2 years for special reasons, but after that they are exempt unless both parties owe the debt. If you are truly going to push the envelope but want to protect core assets you should consider this strategy, especially if your spouse does not make enough income to be needed to sign loans.
I can still put a pay on death benefit on the stock of my investing company so it goes to my wife, and make my wife the beneficiary of my retirement accounts. I can make deeds out to my wife on the properties I own personally and keep them in a shoe box to be used in case I die prematurely, so all my property will still pass to my spouse but she is not personally liable on the debt. Banks cannot call the debt due just because I die per state law, so she can continue the business after I die without personal liability, she just could not acquire new loans I do not plan to fail, but it is an added precaution that is perfectly legal. Hope this helps.
Investor 路 Jonesboro, AR 路 Member since 2015 路 241 posts 路 132 votes
9y
Jerry W. wow! I have never heard of that strategy and I thank you for sharing. I have my properties in an s corp for protection, but I can see the value in what your doing. I believe it wise to eliminate personal debt, like what you have done. I've tried to live my life debt free and that's why I asked the initial question, as debt has taken me past my comfort zone. Thanks again for sharing!