Help me understand mortgages for investment properties

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Help me understand mortgages for investment properties

Calvin Thomas
Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes

Here we go.  Initially, I was a web guy and I founded a few large web sites, which I sold a few years ago.  I still have a few, but the large ones I sold off.  I picked up a house, a car and the rest were in Vanguard funds.  After the crash, errr correction, I started to buy up Real Estate in NY/NJ/CT college towns.  I only have a few properties, but I keep on adding one or two every year to my portfolio.  I've always purchased for cash, no mortgage.  Some, I borrowed on margin against my portfolio, and just paid it off.  At a 1% rate on margin, it beats a mortgage any day of the week.  

Others are telling me now that I should look into commercial mortgages instead of funding them myself.  I am hesitant for a few reasons.  One, I hate debt.  When I was running one of my bigger web sites, I had seven figures of debt over my head as the sole owner each month (salaries, rent, expenses, etc.).  It was a lot of pressure for me (never took VC).  I sold in early 2008.  At that point, I had a few bucks and vowed never to go back into debt.  I run a tight ship with all my businesses.  There is a daily P&L ledger for everything.  

I also structure my real estate as each property is in its own LLC, which in turn, is owned by my main corp. Each LLC has its own insurance, and my main corp has an additional 4m umbrella in case of any liabilities from my disregarded entities (LLC properties).

I am not sure how the mortgage game works, as I've never had to deal with it before. I come in as a cash buyer always. If I am sure, I write a check from my margin account to my bank account, create a note to the new LLC, and get a bank check for the amount. I know I will not be able to continue to do debt free as I grow. However, I am just hesitant about mortgages. I do not like having to give tax returns, pay stubs, notices and reasoning as to why I only have a salary at this amount. Why don't I have a staff. How can you manage all of these properties yourself (I have a PM company sub-manage everything). Maybe I am missing something. Maybe I just do not understand the rationale. I am hoping someone can guide me here. It is not that I am afraid of going into debt. I know I can always borrow from my margin, or get a line of credit against any of my properties. I just do not like not owning everything 100% and having to listen to a bank demand this or that.

What am I missing?  Or, essentially, what am I doing wrong or not understanding which is holding me back from expanding further and faster on new opportunities due to my reluctance in taking on any debt?

Thank you.

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Chad Olsen
Lender · Morgan Hill, CA · Member since 2015 · 55 posts · 24 votes
10y

@Calvin Thomas, you have a really nice reserve fund so that is really good. I've been working on building my reserve fund up this past year and am nearly complete on that task so kudos to you.

The not wanting a mortgage on your credit is likely actually hurting your credit more than it is helping. There are things that really need to be in your credit profile in order to be desired by the banks to give out more credit. And a huge part of that is how well do you already treat other people's money, ie loans, mortgages and credit cards.

Your comment about not wanting to be rich is confusing. If you don't want to be rich, or even wealthy (have free time to do what you want b/c your passive income exceeds your expenses) then why would you be buying rentals or doing anything in the market at all? I'm not afraid to say that I want to be wealthy. I want to be wealthy, so wealthy that I can buy back all my time and spend it as i see fit, not doing what I "have" to do.

There are non-recourse loans out there (no personal guarantee), but you have to have a track record or some other factor that can offset not having a history of treating banks money well. Going after the non-recourse loans is good, I'm working in that direction too. But that doesn't happen overnight and you have to show a good history.

I would recommend two things:

1) Get a copy of the Value of Debt and read it and think about it

2) Reach out to CreditSense.com. The education alone is worth the time to understand what you don't know about your credit profile. I've had the education and am convinced that a strong credit profile is key to getting credit.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y

    @Calvin Thomas

    A mortgage is just a secured loan.  

    You, as the mortgagor, offer (charge) the property, or properties, being mortgaged to the lender in exchange for the loan (note).   If you default on the debt, the lender has the right to foreclose on the property to recover their capital.

    Though many lenders will lend 65 - 75% of the appraised value of the property in a refinance situation such as yours, you do not need to leverage your properties to that degree.  If you wanted to only borrow 50% of the value, you could easily do so.

    If provides a way for you to tap into the equity in your existing properties and use it for other purchases.   However, if you presently have access to cash at 1%, mortgaging your properties may not be the best course of action at the moment.  

    It's a discussion you should have with your accountant.

    1Reply
  • Mark Creason
    Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
    10y

    The reason to use debt is to leverage up your returns.  If you buy a property at a 7 cap rate and pay cash, you are making a return of 7% on your money.  If you can borrow money at 4.5%, your cash on cash return goes up.  In your situation, I would recommend finding a source for non-recourse loans, which would lower your risk against the rest of your portfolio, if you chose to put debt on your properties.

    Mark

    0Reply
  • Calvin Thomas
    OP
    Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
    10y

    Thank you both for your replies.

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Calvin Thomas, if I understand it right, when you use your Margin Account, you are not just being charged 1% interest; you are also LOSING the interest that you would otherwise be getting. And depending on how good your portfolio is performing, that's not small change - or, is it? 

    On the whole, I like your risk-averse attitude. Each potential investment should be looked on it's own merits. But If I understand it right again, if there IS another crash on its way, any money you had borrowed through your Margin Account puts you at similar risk as if you had taken out a normal mortgage? 

    The moral: if the investment can't justify being bought with borrowed money (so that you still have more cash to leverage even more investments), is it such a good investment anyway? All the best...

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  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Calvin Thomas, hmmm, now I am wondering, depending on the proportion of your portfolio's value that you borrow against when buying property, when the crash comes, wouldn't your risk be even GREATER than a normal mortgage (because the value of the WHOLE portfolio goes down)?

    For example, if you have a one million dollar portfolio earning you 5% ($50,000/y), and you "borrow" $100,000 of it to buy you a rental investment, then all of a sudden the stock market nose dives so that your portfolio is only valued at $700,000, all of a sudden you owe your portfolio one dollar for every seven, meaning that your portfolio is only worth $600k.

    But if you had only used $20k and took out a normal mortgage for the other $80k, your portfolio would still be worth $680k.

    In both scenarios, the value of your property investment will likely have fallen by the same proportion, so the real question becomes: how much built-in equity did you manage to achieve to begin with?

    Perhaps what I am really getting at is: if your portfolio suddenly loses 30% of its value, your $100k "borrowing" may well be called upon to be paid by you in FULL immediately, whereas an $80k mortgage may just require a re-appraisal by the Lender rather than a demand for immediate payback? (But in reality, I'm just guessing, for what it's worth)...

    1Reply
  • Chad Olsen
    Lender · Morgan Hill, CA · Member since 2015 · 55 posts · 24 votes
    10y

    I come from the camp where Debt makes you Rich. I used to be of the mindset that debt is bad and that I should work to get rid of debt as fast as possible. But now that I've been on this financial education path for the last three years, I've changed. Debt is a most powerful tool when applied to real estate. There are a number of ways to look at it. 1) Through the return analysis. This is probably something that you would need to look at specifically knowing all the details about your portfolio and each property. 2) Through risk analysis. @Brent Coombs touched on a very valuable point. If you have your base money in the stock market and things go south, your entire real estate portfolio could be in jeopardy. I would recommend reading the book The Value of Debt by Thomas Anderson. 3) Through the business lense. Take a step back and think about what the big companies out there do. What does Apple or Chevron or any other company do when they need money? They take on debt at a marginal rate. Why? Because having cash on hand to show the bank that "Hey, I've done my homework and I think this is a good deal. But if something does go wrong, I have $X,000 in liquid cash sitting in your bank now." Banks will be much more likely to work with you.

    I'd look into some portfolio lending on what you already have to free up the capital to purchase more and start a reserve fund. You may have to work around your entity structure some to accommodate, but in the end a number of properties will pay down your mortgage, further mitigating your risk, while giving you your capital back to do more deals.

    Hope this helps. Good luck!

    1Reply
  • Calvin Thomas
    OP
    Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
    10y
    Originally posted by @Brent Coombs:

    @Calvin Thomas, if I understand it right, when you use your Margin Account, you are not just being charged 1% interest; you are also LOSING the interest that you would otherwise be getting. And depending on how good your portfolio is performing, that's not small change - or, is it? 

    On the whole, I like your risk-averse attitude. Each potential investment should be looked on it's own merits. But If I understand it right again, if there IS another crash on its way, any money you had borrowed through your Margin Account puts you at similar risk as if you had taken out a normal mortgage? 

    The moral: if the investment can't justify being bought with borrowed money (so that you still have more cash to leverage even more investments), is it such a good investment anyway? All the best...

     Just about.  They are in Vanguard funds and actual high quality bonds.  Since I selected the portfolio option, I can borrow up to nearly 80% at around 1.5% all-in-all.  Since I would only borrow around 20%, there is more than enough room to prevent a margin call.  Plus, I would use the income from the rental properties to pay off the line of credit ASAP.  The divs from the muni and corporate bonds pull in around 5%, so the account will still be generating around a 3.5% - 4% return.  It is possible that I would be open to a mortgage or a line of credit against the properties at some point, I am just trying to avoid it as much as possible.  

    0Reply
  • Calvin Thomas
    OP
    Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
    10y
    Originally posted by @Brent Coombs:

    @Calvin Thomas, hmmm, now I am wondering, depending on the proportion of your portfolio's value that you borrow against when buying property, when the crash comes, wouldn't your risk be even GREATER than a normal mortgage (because the value of the WHOLE portfolio goes down)?

    For example, if you have a one million dollar portfolio earning you 5% ($50,000/y), and you "borrow" $100,000 of it to buy you a rental investment, then all of a sudden the stock market nose dives so that your portfolio is only valued at $700,000, all of a sudden you owe your portfolio one dollar for every seven, meaning that your portfolio is only worth $600k.

    But if you had only used $20k and took out a normal mortgage for the other $80k, your portfolio would still be worth $680k.

    In both scenarios, the value of your property investment will likely have fallen by the same proportion, so the real question becomes: how much built-in equity did you manage to achieve to begin with?

    Perhaps what I am really getting at is: if your portfolio suddenly loses 30% of its value, your $100k "borrowing" may well be called upon to be paid by you in FULL immediately, whereas an $80k mortgage may just require a re-appraisal by the Lender rather than a demand for immediate payback? (But in reality, I'm just guessing, for what it's worth)...

    I can assure you the market will not just drop 30%.  I am also a RIA, so I am pretty well versed in the market.  Not perfect, but I do have over 20 years under my belt with the market.  Markets do not just drop like that.  There are breakers placed in to prevent a major drop/panic.  In addition, even the worse daily drop, excluding the flash crash which was reversed by the regulators, was in 87 at 22%.  Which, recovered I believe in about 2 months.  With that said, using only 20% of the margin shouldn't cause much of an issue.  I will have continue to test my theories and results, but it's a pretty safe bet.

    0Reply
  • Calvin Thomas
    OP
    Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
    10y
    Originally posted by @Chad Olsen:

    I come from the camp where Debt makes you Rich. I used to be of the mindset that debt is bad and that I should work to get rid of debt as fast as possible. But now that I've been on this financial education path for the last three years, I've changed. Debt is a most powerful tool when applied to real estate. There are a number of ways to look at it. 1) Through the return analysis. This is probably something that you would need to look at specifically knowing all the details about your portfolio and each property. 2) Through risk analysis. @Brent Coombs touched on a very valuable point. If you have your base money in the stock market and things go south, your entire real estate portfolio could be in jeopardy. I would recommend reading the book The Value of Debt by Thomas Anderson. 3) Through the business lense. Take a step back and think about what the big companies out there do. What does Apple or Chevron or any other company do when they need money? They take on debt at a marginal rate. Why? Because having cash on hand to show the bank that "Hey, I've done my homework and I think this is a good deal. But if something does go wrong, I have $X,000 in liquid cash sitting in your bank now." Banks will be much more likely to work with you.

    I'd look into some portfolio lending on what you already have to free up the capital to purchase more and start a reserve fund. You may have to work around your entity structure some to accommodate, but in the end a number of properties will pay down your mortgage, further mitigating your risk, while giving you your capital back to do more deals.

    Hope this helps. Good luck!

     I get that debt makes a person rich.  Not trying to be rich, I am just trying to maintain what I have along with some stable grow through a variety of different means.  I.E. like not having all your eggs in one basket.  

    Are their any mortgages or lines of commercial credit out there that I wouldn't have to PG? Not really looking to PG anything.  As for a cushion of cash, I do keep some in cash to handle expenses and maintenance on my properties and other businesses.  Just trying to level out the risks from everything.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Calvin Thomas, if you are assured about the future health of your portfolio (including all your 100% owned properties), then why would you be scared to personally guarantee being able to pay back a first mortgage for your next property? Or the one after that? 

    If you're worried about flood/fire damage and the like, that's what Insurance is for, right? I'd be more worried about the future performance of Mutual Funds than I would be about signing a personal guarantee to pay back the mortgage on my own well chosen and value-priced properties.

    Eggs in different baskets is a fine strategy, but shouldn't property investing factor higher than a maximum of just 20% of your available cash? Just asking...

    0Reply
  • Calvin Thomas
    OP
    Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
    10y

    No doubt. However, the 20% was just how much I may use from margin.  I keep around 250k in cash/CDs for emergencies on my properties.  Not worried about flood or fire damage, I just do not want any mortgages on my credit.  

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  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Calvin Thomas, you are WAY too conservative in my book. 

    $250k pocket money for contingencies?! Well in that case, what do I know?...

    0Reply
  • Calvin Thomas
    OP
    Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
    10y
    Originally posted by @Brent Coombs:

    @Calvin Thomas, you are WAY too conservative in my book. 

    $250k pocket money for contingencies?! Well in that case, what do I know?...

    Yea, everyone tells me I am a bit too conservative.  In NY/NJ/CT, 250k is not much sadly. 250k, is not pocket money.  That's just what I built up from my current rent flow.  As I buy more MFH, the reserves go up.  

    0Reply
  • Chad Olsen
    Lender · Morgan Hill, CA · Member since 2015 · 55 posts · 24 votes
    10y

    @Calvin Thomas, you have a really nice reserve fund so that is really good. I've been working on building my reserve fund up this past year and am nearly complete on that task so kudos to you.

    The not wanting a mortgage on your credit is likely actually hurting your credit more than it is helping. There are things that really need to be in your credit profile in order to be desired by the banks to give out more credit. And a huge part of that is how well do you already treat other people's money, ie loans, mortgages and credit cards.

    Your comment about not wanting to be rich is confusing. If you don't want to be rich, or even wealthy (have free time to do what you want b/c your passive income exceeds your expenses) then why would you be buying rentals or doing anything in the market at all? I'm not afraid to say that I want to be wealthy. I want to be wealthy, so wealthy that I can buy back all my time and spend it as i see fit, not doing what I "have" to do.

    There are non-recourse loans out there (no personal guarantee), but you have to have a track record or some other factor that can offset not having a history of treating banks money well. Going after the non-recourse loans is good, I'm working in that direction too. But that doesn't happen overnight and you have to show a good history.

    I would recommend two things:

    1) Get a copy of the Value of Debt and read it and think about it

    2) Reach out to CreditSense.com. The education alone is worth the time to understand what you don't know about your credit profile. I've had the education and am convinced that a strong credit profile is key to getting credit.

    2Reply
  • Calvin Thomas
    OP
    Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
    10y
    Originally posted by @Chad Olsen:

    @Calvin Thomas, you have a really nice reserve fund so that is really good. I've been working on building my reserve fund up this past year and am nearly complete on that task so kudos to you.

    The not wanting a mortgage on your credit is likely actually hurting your credit more than it is helping. There are things that really need to be in your credit profile in order to be desired by the banks to give out more credit. And a huge part of that is how well do you already treat other people's money, ie loans, mortgages and credit cards.

    Your comment about not wanting to be rich is confusing. If you don't want to be rich, or even wealthy (have free time to do what you want b/c your passive income exceeds your expenses) then why would you be buying rentals or doing anything in the market at all? I'm not afraid to say that I want to be wealthy. I want to be wealthy, so wealthy that I can buy back all my time and spend it as i see fit, not doing what I "have" to do.

    There are non-recourse loans out there (no personal guarantee), but you have to have a track record or some other factor that can offset not having a history of treating banks money well. Going after the non-recourse loans is good, I'm working in that direction too. But that doesn't happen overnight and you have to show a good history.

    I would recommend two things:

    1) Get a copy of the Value of Debt and read it and think about it

    2) Reach out to CreditSense.com. The education alone is worth the time to understand what you don't know about your credit profile. I've had the education and am convinced that a strong credit profile is key to getting credit.

    Thank you for the kind comments.  

    My FICO is 806, so it's pretty high and I have personal credit cards and credit lines over 200k as well.  My credit has allowed me to get nice bonuses like free trips and money for opening up bank accounts and credit cards.  Since I pay the debt off quick, I do not made that type of debt.  I only keep it on my books for, at most, a month until I pay it off.

    My comment on not wanting to be rich may had come off incorrectly.  Since selling my companies, I am pretty much okay financially.  I added Real Estate investing after the 2008 - 2009 correction as another business to run for the foreseeable future.  I enjoy doing it, it makes a nice cashflow, and I feel I am giving back to the community while making a nice profit.  I always like to have multiple streams of income.  In case one goes south or has issues, the others pickup the slack.  

    I am going to look into these non-recourse loans.  However, I assume the rates would be higher than 3% or so.  I use a few banks.  They find it a bit strange that I do not use debt to grow even more.  I am with Dave Ramsey on the debt issue.  Never use it unless you have too.  If you do, then pay it off as fast as possible.  As I said previously, when running my previous company, before selling it, I ran massive business credit lines, and I was always concerned about the debt levels.  Debt also my my father's and sister's lives hell.  Hence, I am a bit deterred by it.  

    0Reply
  • Chad Olsen
    Lender · Morgan Hill, CA · Member since 2015 · 55 posts · 24 votes
    10y

    @Calvin Thomas No worries. I totally get it. The best analogy I've heard is that debt is like a fast car. You may know how to drive a car, but not a fast car. Not everyone can be an F1 driver for instance. So thinking you can drive really fast with your debt when you don't know what you are doing, can be very dangerous. I'm sorry that your family has had some hard times with their debt. That is why BP is such a great place to learn about what do and don't know so that you can get better.

    I would be very interested to know more about your history with business lines and how you got them and utilized them. We are working to build up our personal credit more so that we can move into building our business credit. A slow and difficult prospect.

    0Reply
  • Calvin Thomas
    OP
    Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
    10y

    Hey Chad, I am no master, but I can only give some info from my past experiences.  If any of my experiences can help, I am happy to share.  As for building credit and business lines, that is pretty easy as long as you have a high FICO score.  Anything higher than 760 is pretty good.  I always start out with credit cards.  Stay away from Chase, but AMEX, Citibank, US Bank, Wells Fargo, TD Bank and Discover a great one's to start off with.  Excellent way to build steady credit over time and get rewarded in the process.  Check out DoctorOfCredit dot com for some great offers on all different types of bank accounts, loans and credit cards (I am not affiliated with said site, but I do use it weekly).  Always keep personal expenses separate from business expenses. NEVER, NEVER, NEVER co-mingle.  While you will be required to PG a business card, it still is separate from your personal credit.  Some great business cards are AMEX Plum (used as a trade credit line that offers 1.5% cash back on all purchases if paid off within 10 business days).  Capital One Spark is also a fantastic business credit card.  It will with give you 2% cash back or 2 miles per $1.00 spent on all expenses.  If you are doing rehabbing, registering corps, maintenance, etc., pay via credit card instead of check or cash.  The year end summaries help with taxes as well.

    If one does not have a high FICO score, we can work with that as well.  You need at least a 680 for most credit cards, but the higher end ones require much higher (such like a mortgage score of 720+).  Just opening up small credit cards and paying them off immediately before the close of one's statement helps a lot.  Two of the biggest percentages of one's credit is based on payment history, and utilization of credit.  Each card, or line of credit, should be less than 30%.  Hence, over time, you need to have a good amount of lines or credit cards open in order to ensure you can spread the utilization over multiple credit lines/cards.  Having said that, if one is going to apply for a mortgage within 3 months, this can hurt you when going through the app process (one of the reasons why I was interested in non-recourse loans not based on credit).  Other option, but I am not entirely sure it is open for all investment properties are mortgages/loans which are manually underwritten (held by the banks, and not re-sold as CDOs).

    Some people like to deal with small banks, I tend not to like to deal with them.  I like Wells Fargo and TD Bank for bank accounts and loans.  Once you establish an account there, both banks will help with loans and other assistance along the way.  Another good one is Capital One.  During the recession, these banks were amongst the strongest banks out there.  

    It is important to have savings, both in personal and business.  I highly recommend Discover Bank, Ally Bank, and Barclay Savings for online business savings accounts.  They pay at least 1% on all deposits.  For business, Capital One 360 pays the most currently.  All have no fees.

    That's a good place to start for building credit.  It's always best to have a good strong personal credit base to build off of for a business.  Over a few years, one should be able to build off of that where eventually, the business would be able to stand on it's own (hopefully).  What I cannot stress enough is reserves.  All should aim for one year of reserves to cover both personal and business expenses in cash.  Reason being, one can have 500k in credit lines and loans.  However, once a recession hits, banks start to tighten their belts.  Sometimes, they play the chase the credit line game.  Where as they keep on reducing the credit line as you pay it off until it hits zero.  Then, they just cut you off.  Not a fun game for anyone to play.

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Calvin Thomas, wow! You seem to have gone to extraordinary lengths to build up a great Credit score, and, you know all the potential downsides if/when things end up going south. BUT, as far as I can see, you would have been just as well off all the way along by instead, taking out standard Mortgage/Loans for your property investments. You would have been able to pay them back within similar time frames as your Credit Card / Margin Account combinations; and probably at similar overall interest! Right?

    How would paying back your mortgages on time, every time, hurt your Credit?

    0Reply
  • Calvin Thomas
    OP
    Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
    10y
    Originally posted by @Brent Coombs:

    @Calvin Thomas, wow! You seem to have gone to extraordinary lengths to build up a great Credit score, and, you know all the potential downsides if/when things end up going south. BUT, as far as I can see, you would have been just as well off all the way along by instead, taking out standard Mortgage/Loans for your property investments. You would have been able to pay them back within similar time frames as your Credit Card / Margin Account combinations; and probably at similar overall interest! Right?

    How would paying back your mortgages on time, every time, hurt your Credit?

    I do not think it would.  The margin interest was between 0.75% - 1.49%.  It would be hard to get that type of loan through any means other than margin.  I tend not to pay interest if I do not have too.  While my accounts are not very big for New York City standards, if I moved them to another bank for a better rate, the current bank would notice.  Thus, it's best to work with me on my rates and fees.  Even when the say it is not negotiable, it is.  Everything is negotiable.  Everything..  Worse case scenario for me is I go to another bank that would meet my needs in fees and rates.  Usual scenario, we meet in the middle, and I am happy with that.  My dad always told me, it not what you sell things for, it's what you buy things at.  It rains true here as well.  If you can lower your overall handling costs for OPM (banks), then you realize more money.  Immediately.  Why pay 5k in mortgage closing costs, where there are ZERO closing costs with a line of credit or a margin loan?  Margin is risky, no doubt about that, however, you have three days to bring the funds into the account.  In addition, if you had a 1mm in stocks/funds/bonds/etc., and only use 20% - 35%, you can safely say you would be insulated from a margin call.  If you used that 250k - 350k to buy two or three (or more homes) outright with no mortgage, you are already ahead of the game.  You saved 10k + in mortgage closing and appraisal fees for said homes.  It's all about mathematics.  The numbers work or they don't.  I'd rather have that 5k, or 10k in my bank account or working on a rehab, or investing in a muni instead of giving it to appraisers, brokers, bankers, etc.        

    However, one could say, the leverage could help you in really really good times, but hurt you in really really bad times.  Murphy's law comes out to bite people in the butt at strange times in their lives.  In good times, things are sailing through and you are added new properties and renters.  In bad times, you have unrented homes, or late payers, or issues with the mortgage, or an adjustable rate, etc.  If one is able to not have  a mortgage on these properties, or just a few, they could be much better off in bad times.  I am not sure if you recall, but for about 1.5 years, most banks dried up lending to only the best of the best companies.  If a person is leveraged to the hilt, and they hit some bad luck, they will be in for some real painful lessons in finance 101.  In addition, their portfolio, just like in the market, could be wiped out.  I know this goes against the BP philosophy, however, as a person who experienced with with friends, family and foes, I can tell you; it is not a pretty sight to see.  Well, maybe for the foes, but not the others.  Not saying to not take a mortgage, I am just saying, if possible, not go balls to the wall and mortgage every property to the hilt.  

    I know, most of the ppl reading this thread must think I am crazy.  No, just risk tolerant.  Only experience in seeing others get wiped out because of being over leveraged teaches a thing or two about financial responsibility.  No, I wasn't playing Monday morning quarterback.  I was saying for years, the punch bowl can and will be taken away sooner or later.  It's best to prepare.  No one listed to me and said I am too conservative and have to live life.  These are the people that purchased more and more real estate and refinanced their props. when they kept on receiving sky high appraisals.  They basically used their homes as ATMs.  Well, those homes are no longer with their original owners.  Just remember, hindsight is 20/20.  Expect the best, but prepare for the worst.  As history has told all of us, there is little warning before the perfect storm hits and wipes a few of us out.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Calvin Thomas, all quite well put. One point: you are risk INtolerant, not risk tolerant. Nothing wrong with that. But judging by the title of this (YOUR) thread, you must be a LITTLE tempted to dip your toes into a mortgage pool?

    Another point: BP does NOT advocate being leveraged up to the hilt - quite the opposite. Being "overleveraged" is by definition - reckless! (But yes, who is doing the defining)?

    You did very well to cash in many of your chips in 2007. Kudos. Otherwise, you might not NOW have the choice to either borrow or not borrow! Cheers...

    0Reply
  • Calvin Thomas
    OP
    Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
    10y
    Originally posted by @Brent Coombs:

    @Calvin Thomas, all quite well put. One point: you are risk INtolerant, not risk tolerant. Nothing wrong with that. But judging by the title of this (YOUR) thread, you must be a LITTLE tempted to dip your toes into a mortgage pool?

    Another point: BP does NOT advocate being leveraged up to the hilt - quite the opposite. Being "overleveraged" is by definition - reckless! (But yes, who is doing the defining)?

    You did very well to cash in many of your chips in 2007. Kudos. Otherwise, you might not NOW have the choice to either borrow or not borrow! Cheers...

     Possibly.  I am pondering between a mortgage or continue through margin.  Not a big fan of the fees assoc. with the mortgage.

    0Reply
  • Dana WhickerPro Member
    Investor · Fernandina Beach, FL · Member since 2014 · 557 posts · 374 votes
    10y

    @Calvin Thomas

    From what you've shared so far I don't think you need any mortgages. It sounds like you already have a decent amount of capital and a good wealth building machine in place. Just keep adding a property or 2 a year and you're all set.

    1Reply
  • David Kelly
    Investor · Durham, NC · Member since 2015 · 11 posts · 5 votes
    10y
    Fantastic conversation and breakdown. I don't really have much to add as I only have two properties and I'm still learning all of this detailed process. Thank you for sharing. This way of loc/margin buying is very much my intention too. Currently we have two properties with mortgages and in our personal names. (I would like to move them out into LLC's but at least one has a due on sale clause. :/ I come from the construction side of things. I can do most of the work necessary in the rehab - at least be site manager. My wife has the secure, decent job - so she has bolstered the financial side. But now I'm starting to feel the need to understand the seemingly complex nature of all the RE options of financing and which path we go down. We are currently renting the two properties and sold another in 2013 that made a great return: 50k purchase with 25k rehab - one year of renting and sold for 183k). This allowed for another 55k purchase with 62 rehab/now rental with bank appraised refi value at 280k. So we have an available hloc with 100k. For example, by margin purchase - do you mean home equity line of credit off of a a purchase? I'm thinking that it's not but I'm just not sure what that means.
    0Reply
  • Dan Vleck
    Deerwood, MN · Member since 2014 · 184 posts · 122 votes
    10y

    I am also a fan of Dave R. I have mortgages, but often wonder if I should start paying them off or buying more with loans. I've decided that I'd keep buying more with loans until the banks stop lending me money. Then I will pay them down. This method provides me the best rate of return. After reading The Millionaire Real Estate Investor, I decided there was no right way to do REI. People have become wealthy many different ways, regarding how they financed.

    I hope your success continues @Calvin Thomas.

    1Reply
  • Calvin Thomas
    OP
    Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
    10y
    Originally posted by @David Kelly:

    Fantastic conversation and breakdown. I don't really have much to add as I only have two properties and I'm still learning all of this detailed process.

    Thank you for sharing. This way of loc/margin buying is very much my intention too. Currently we have two properties with mortgages and in our personal names. (I would like to move them out into LLC's but at least one has a due on sale clause. :/

    I come from the construction side of things. I can do most of the work necessary in the rehab - at least be site manager. My wife has the secure, decent job - so she has bolstered the financial side. But now I'm starting to feel the need to understand the seemingly complex nature of all the RE options of financing and which path we go down. We are currently renting the two properties and sold another in 2013 that made a great return: 50k purchase with 25k rehab - one year of renting and sold for 183k). This allowed for another 55k purchase with 62 rehab/now rental with bank appraised refi value at 280k. So we have an available hloc with 100k.

    For example, by margin purchase - do you mean home equity line of credit off of a a purchase? I'm thinking that it's not but I'm just not sure what that means.

    Margin is when you use your investment assets, such as stocks, bonds, ETFs, mutual funds, etc. as collateral and you can borrow against that amount, usually up to 75%.  It is a bit dangerous, as if you borrow too much, and have a margin call, it can be a bit scary.  However, if you give yourself a lot of room, like only borrow up to 40%, you can, usually, be safe from a margin call.  Most higher end brokerages  will offer very competitive loans against margin for balances over 500k.  A person just needs to bank or brokerage private wealth group to negotiate better rates.  I was just at Citibank yesterday and they offered me 2.25% on a margin loan.  When you have balances over 5m, you can negotiate rates as low as 0.25 basis points (0.25%).  Again, just another tool.  

    0Reply
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