How do you have multiple mortgages without over leveraging?

Question

Im an uber newb still absorbing. My current question is "How do you have multiple mortgages without over leveraging?" If I want to hit 90 units and enjoy it I need to build a portfolio with several units a year.

When do I know its okay to get another unit?

Do I need a war chest for CapEx and vacancy before picking up the unit it?

Thanks

RZ

Peter Tverdov · Answer

If you think you're "over leveraged" by buying more than one property then I don't think you know what that term means.

A. Do you have enough reserves per property in case of vacancy, roof repair, emergency, etc? Most banks require you to have 6 months of reserves per investment property and if you have capex in addition to that requirement I would say yes here for almost everyone.

B. How big of a drop in rents can you take before you go from cash flow positive, to cash flow negative? 1%? 10%? 25%? 40%? That will give you a good idea if you're over leveraged on a property.

C. How long can I carry vacancies on each property? Can property A cover B's vacancy? Can my reserves? How long?

D. Do you own everything in the same area? Are you okay with that? All same class of properties? All SFH? All commercial? All multi-family?

I use a risk management spreadsheet that I created that helps me stay disciplined while I am so eager to continue to grow. I will NOT allow my portfolio to go above 75% LTV. I need typically a 25% buffer between where rents are now and how far they'd have to drop for me to make $0 on the property. I typically always walk into equity because I know exactly where prices should be in certain areas. I am a human algorithm in my specialty areas.

Jacqueline Cliff · Answer

Just adding to what has already been said....keep in mind that lenders will require a minimum of 2 years of landlord experience before they will allow you to use the 75% of rental income towards your debt load.  So make sure that you are reporting any income received from "hacking" on a schedule E as they will want to see that for verification.  Also make sure you have a solid paper trail showing all rental income received as well as documented lease agreements.

Roger Wagoner · Answer

I just bought my first duplex, and am moving in this week. That said, I'm looking forward to the next 12 months when I want to start looking and buy a 2nd property, so this is something I'm looking at myself. My challenge is my area in Seattle is to look outside of the metro area and go further out to find anything that cash flows, so I might make my 2nd purchase a BRRR as opposed to a multi family. I'll feel comfortable in buying again when I have 6 months x my full payment of (mortgage, PMI, taxes), after everything is rehabilitated. I guess it could be said I didn't buy "right", but this is my first property bought off the MLS, so I'll be looking for my 2nd deal to be a great buy, and will be looking way beyond MLS to find the perfect deal.

Darren Budahn · Answer

If you buy "right," and have built in equity in each property you buy, then you don't have to worry about over leveraging.  Also, as long as the property's cash flow, you can survive a downturn without being forced to sell when you don't want to. Don't worry about building about a war chest before you buy 1 property.  If you buy solid cash flowing properties with built in equity, you can quickly get the snowball rolling and use the cash flow for future cap-ex.  Also, if you buy right and are able to refinance you can hopefully recycle your funds over and over again.  If you are just starting out I would take a look at house hacking.

RZ Holli · Answer

@Christopher Phillips Thank you so much for taking the time to answer my questions. Have an Amazing day.

Christopher Phillips · Answer

@RZ Holli

Depends on the property. If the property is already rented or you have executed leases, 75% of the rental income "can" be counted. However, if you don't have tenants yet, then the debt will count towards your DTI ratio. So, a lot of it has to do with timing.

It's not easy to get financing for an empty property that you are going to occupy unless you have 25% to 30% down payment and the credit worthiness to carry the loan.

As an owner occupant, that allows you to get an FHA loan for up to 1-4 family properties. But, without tenants, you have to have the income and credit to get the loan.

If you have experience as a landlord and the place is occupied, they can count 75% of rental income and that allows you to use that as part of your DTI ratios.

Some lenders might require you to have a certain amount in reserves to obtain a loan. So, it depends on where you get the loan and how much they want in reserves.

Kevin Hunter · Answer

@RZ Holli, it is really good that you are asking this question.  It shows that you are thinking the process through before making rash decisions.  @Peter T. makes a really good point when talking about rents.  If you buy right, and have good cash flow up front, it will allow you to be protected from a down turn.   The rents can decrease but you can remain green.  Additionally, buying right will hopefully allow you to gain instant equity.  If you buy a house for a discount then you are well positioned in case of a market swing...

Keep your borrowing power a consistent part of your equation so you don't ever get in to a position where you are over leveraged and you are bound to succeed.

Parshwa Shah · Answer

would you mind sharing your spreadsheet?

RZ Holli · Answer

@Darren Budahn  @Jacqueline Cliff  @Peter T.   @Pete Perez

Thank you all for the valuable info and time from your day.

Pete Perez · Answer

Great question. The easiest way is to have plenty of cash. However, most people (myself included) don't have huge reserve amounts. That is why BRRRR is so popular. Acquire rentals, and preserve capital. You should have enough room in your rentals that if the market took a nose dive you'd be able to survive it. That is either equity, or plenty of cash flow. If rents took a 20% dip how long would you be able to hold on before they recover? If the answer is indefinitely you are probably in a strong position.

How do you have multiple mortgages without over leveraging?

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