At what level of leverage can you sleep at night peacefully?

Question

I am curious to know from the BP members at what level of leverage on your real estate investments do you feel that you can sleep at night peacefully?

One of the REI books I've read said that even if you have a mortage of a million dollar against your rental properties, if you have a million in cash, it is the same as owning your investment properties clear and free. This way you should be able to sleep at night as you know you can pay off the debt at anytime. Do some of you investors have a guideline that you use as to how much leverage you feel comfortable with? I am not sure if this is a good rule of thumb, but i try to make sure that my mortgage loans do not exceed the cash i have in hand. Is this being too conservative as an investor?

For those of you investing in rental SFRs, what type of rates are you getting from the banks for a 30 year fix with 25% down these days?

Mike H. · Answer

I'm in the same boat as above. I don't worry at all about the leverage. What I do care about, though, is the cash flow. The houses that only cash flow $200 or $250 (a couple of my earlier houses) are the ones I'd like to pay down on.

My recent ones are making me $400 to 500 a month.  Those are the ones I don't worry about at all.

To me, the LTV means very little since I'm going to hold for awhile. Its the cash flow and risk of nonpayment ratio. 
i.e. $400 a month on a house with PITI of 800 is better than $400 a month on a house with PITI of 1000 because if either go vacant for a couple of months, I'll get back to profits quicker on the first than the second.

Its not really anything I've seen but just my personal preference on risk/leverage.

One example would be if you had a house with an LTV of 60% that rented for 1,500 but only cash flowed $100 per month.  Thats a risky investment to me.  One month of nonpayment and you're digging into your own pocket for the year.

But you could just as easily have a house with an LTV of 80% that rents for $1300 and has a net cash flow of $400.  I'd take that one any day of the week over the first one.

So I guess my long winded answer would be: My target is always about the cash flow against PITI as opposed to the LTV. That being said, you better have your LTV"s in line or you're going to have a real hard time getting financing. :-)

Scott R. · Answer

as long as im making money on the property i dont care!
If I can mortage 100%, 14% interest, and still cash flow, using 50% rule, im fine with it. when i started I didnt have money to carry properties for 1 month unrented, guess what, i worked harder, faster, and made it work. kinda wish now a days i had no reserves, although my reserve fund is TINY compared to most, I think if I had NONE I would be at one of my empty recently vandalized properties right now replacing sheetrock as oppose to being on BP!
people FREAK OUT when I tell them I pay 14% for some of my money, and up to 5 points up front.
yet I couldnt of gotten into this property without it, property is on a 5 year note, 20k purchase, PI $475ish, and rents for $700.. althought this doesnt fit all the rules and guidelines on this board, im willing to strech some and have this property paid off in 5 years. If it wasnt for that money at 14%, I couldnt of purchased this property, period. Was rented on hud for 2 of those 5 years for $800
smart investment IMO.

Bryan Hancock · Answer

The answer should really depend on your age and how easily you can generate cash from activities external to your real estate business.  I am young and I keep 10-20% of my long-term debt in cash.  I also try not to exceed 2.5 D/E for my overall portfolio.  Our goal this year is to decrease our overall D/E to under 1.

I sleep very well at night even with what some would consider frothy leverage.  We do intend to decrease this over time as we age though.

Albert Hasson · Answer

I put 25% down on each property, put 10-15k in Reno costs per property and end up with about a 60% LTV on each.  With that I sleep great at night!

Jeff S. · Answer

James, you are very conservative for your age.  For my age, 59, having cash equal to debt is reasonable.

In my later 30's it was 90% debt.

Before that it was upside down.

Probably should have levered more but watched too many go up in flames in my lifetime.

James H. · Answer

I am inclined to think like Scott. If it works, it works. I don't really care if the ratios and other interpretations of numbers look fancy or if I can brag about them at a cocktail party. My first, and only so far, investment looks marginal on paper with 12 to 14 percent consumer financing. But, since I have a JOB and can pay for it even if it doesn't rent, Im okay with it. Add to that, that it will be a free and clear property in less than 2 years. And, since I used consumer credit, I could default on all my payments and nobody can forclose on the house.

I do think, however, if you make wise investments, these ratios will work themselves out and will trend to industry acceptable ranges whether you are targeting them or not.

Account Closed · Answer

I wonder how many investors would be wiped out if 1 deal went south on them unexpectedly.   The thought of that alone would keep me up at night.    I have traded stocks on and off for years and I am shocked at how many daytraders get taken out with just a single bad trade.  You can have a string of successes but if you are too levered that one bad one that you didn't see coming can take you out of the game.

Nathan Emmert · Answer

I'll disagree with Scott but tend to be closer to Mike.

LTV means little to me as I don't have an exit strategy that involves selling.

To me, it's all about my DTI ratio on the investments.  I'm looking to keep my debt servicing (Principle + Interest) at less than 3:1 to the income.  Even if I had 50% vacancy, I could pay the bills.  I might have some deferred maintenance mind you, but wouldn't have any homes at risk... and 50% vacancy would be a pretty extreme situation across a portfolio of homes.  I sleep well understanding I have that margin.

Steve L. · Answer

I am comfortable with a fair amount of debt as well.  I have many of my rentals leveraged at 60% of value and expensive debt.

I am young and concentrating on building a portfolio and really feel now is the right market to expand.

Andrew Jones · Answer

75% with long term cheap money.

At what level of leverage can you sleep at night peacefully?

Most Popular Reply