Determining Leverage Levels

5 Replies

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.

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. 

I will echo @Robert T. in that cash flow is the first priority. After that it is up to your own tolerance level and what the lenders will agree to. I try to stay about 50% right now but if the mother of all deals came along I would consider more as long as what I am leveraging still cash flows at the new payment.

Its based on cash flow as others have stated.

If I get a deal at 20% discount then I typically have to put 20% down so that only 60% is financed. That's just what I have found to work in my area.

However I try to be all in at 60% when I run my numbers so that I can refinance all my capital back out and still be 60% financed and have the same cash flow. These deals are harder to find, but that's my target on each deal. Sometimes I have to leave a bit in the deal when I refinance if the deal isn't perfect.

Short answer is let your cash flow decide how much you need to finance to get the cash flow desired. If you find it takes alot of cash to get to your numbers maybe it's not that great of a deal.

Jeff V

I evaluate cash flow based on a hypothetical 100% financing. Under this investing principal I seek maximum leverage, often 100%, when ever possible.

Keep in mind that dead equity is the most expensive route to purchasing artificial cash flow. It is really only smoke and mirrors to view cash flow as being positive when purchased with your own money (DP). It actually is not cash flow positive if not generated solely by the merit of the property itself.

If buying cash flow is your approach to wise investing then in theory every property can be cash flow positive. Is that todays new  investing philosophy. 

Though I haven't been able to find a deal that 100% financing would work, I agree with @Thomas S. : you should be trying to make the numbers work where you get a good enough discount with postivie cash flow to justify 100% financing.