At what point are we leveraged correctly?

[Nicholas A.]

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.]

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.