Determining Leverage Levels

[Milton Rivera]

Hello BP,

I was wondering how do you evaluate/determine your comfort level with regards to leverage. 
Typical SFH lender guidelines allow for (75-80%) leverage on properties and consider your debt to income ratio. Portfolio lenders typically follow the same (75%-80%) rule and consider the additional income from your properties and perhaps relax on the debt to income ratio and as long as the deal makes sense and generates positive cash flow. Based on the latter approach, you can essence acquire an infinite number of properties. Obviously, individual preferences, goals and risk tolerances play a key role. I was just wondering what type of guidelines investors are using when it comes to leverage.

[Robert T.]

Positive cash flow is far more important than the amount leveraged. If you over leverage and have negative cash flow it will probably be your last deal. Though there’s different opinions on what percentage of your monthly income to estimate for repairs, vacancy and turnover generally the numbers are 30-50% of your monthly rent goes to expenses. That means your monthly mortgage payments need to be less than 70% of your rents.