At what point are we leveraged correctly?

Question

I currently own about four units, and things have been going smoothly. I plan to keep acquiring more, but it struck me recently—at what point do I become overleveraged?

Is there a specific formula investors use to gauge whether they’re properly leveraged, so they can continue buying rentals with confidence even during tougher economic cycles?

Perhaps there are multiple ways to calculate this. I’d be interested in hearing your thoughts.

Jill F. · Answer

It depends on your goals for your business. I usually start with 75-80% leverage because that is what my bank will allow and once my leverage is down to around 50%property due to improvements or market appreciation and/or loan pay down, I use it as collateral or cash-out refi to buy additional properties or I sell it to buy something bigger because I am focused on growing my business by expanding my portfolio. At some point, I'll stop buying and focus on maximizing the cash flow from existing units.

Jason Malabute · Answer

For me, the main point is balance. I’d rather not stretch myself too thin with debt, so I make it a priority to pay down a good amount of my portfolio. Everyone has a different threshold, but the best approach is sticking with the level of leverage that makes you feel comfortable and secure at the end of the day.

Josh L. · Answer

@Nicholas A. I agree with @Jill F. start with bank as highest amount of leverage.

There were some podcast guests on BP many, many years back that shared helpful tips. One mentioned that he viewed it as ‘musical chairs,’ and at the time he didn’t want to be overleveraged, so he ‘took his chair’ by paying off a majority of his portfolio (not all but got pretty conserative). I thought that was an interesting way to look at it.

I always go back to whatever let's you sleep at night. Good problem to have! Congrats on the portfolio.

At what point are we leveraged correctly?

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