Rentals: Debt and Leverage, Free-and-Clear, or Happy Medium

Rentals: Debt and Leverage, Free-and-Clear, or Happy Medium

Investor · Indianapolis, IN · Member since 2015 · 393 posts · 116 votes

Hey guys! Surely this has been discussed before, but figured I'd start my own thread on this topic for convenience's sake (selfish, I know haha). 

Although my active real estate business is wholesaling, my goal is to channel the opportunities and income from wholesaling into a buy-and-hold approach, as I'm sure many others who find themselves in a similar situation do. While I've accumulated a decent amount of experience on the rental side over the last few years, as time goes on I continue to learn more about real estate financing, taxes, and my own sanity (lol), and as a result, my perspective and opinion on debt and how I personally approach it changes.

Undoubtedly, there are many pros to leveraging debt when investing. One can scale a lot quicker. One can take advantages of tax write-offs. It allows you to employ BRRRR (if done correctly). However, leveraging can also bring about its negatives. Your cash flow per unit is significantly affected. When scaling quickly, you have more properties to worry about and more potential headaches. It also makes you more vulnerable and susceptible to economic swings. Overall, it can add a lot more stress to your life, and while scaling and owning a ton of real estate sounds (is?) sexy, if it's detracting from your quality of life, one could argue it defeats the purpose; I personally know investors that went from owning 60+ SFR's with debt to selling most doors in order to own a fraction of them free-and-clear for the peace of mind and ability to "sleep better at night."

Of course, there is no one way to skin the cat, as different investors have different risk tolerance, and different approaches to this business in general given a wide array of varying factors. And so I'm curious:

As a buy-and-hold investor, where do you stand and why? Do you prefer to leverage as much as possible, or would you rather own free-and-clear? Have you found a happy medium with a mixture of both? Perhaps you throw debt on some, and not on others, or maybe you leverage each at 50%, or any other ratio that is not a typical 75% LTV (of course, this depends a lot on the lender), in order to cover more risk and utilize the advantages of leverage while safekeeping sanity. Regardless of approach, how did you arrive at your chosen relationship with debt (or lack-thereof) and what major points did you consider when arriving there?

There is no right or wrong way to this, and investors figure out what is personally "right" for them. I myself am still on the journey figuring out my ideal balance- which is why it'd be great hear how people approach this relationship in their personal investments. 

Would love to hear your thoughts!

Cheers

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y

It's a question of basic math.  Everything that comes out of your pocket is a cost to you (as in paid for by you).  Everything that is paid for out of the rent is a cost to the tenant (as in paid for by the tenant).  In order to make a profit, you have to recover "your" costs.  The larger "your" costs are, the more "you" have to recover and the longer it takes.  The larger the DP, the more "you" paid for the property since the rest of it, if leveraged, is paid for by the tenant...as long as you have positive CF.

Example:  $100k property; Cash Flow without Mortgage = $10k/year;  CF w/ mortgage = $5k/yr

Option #1 - 100% cash purchase of 1 property
Cost = $100k; 
Equity  = $100k
CF/Yr = $10k
# yrs to recovery of cost = 10
Profit after 10 years = 0

Option #2a - 20% DP; financed = $80k of 1 property

Cost = $20k
Equity = $20k
CF/Yr = $5k
# yrs to recovery of cost = 4
Profit after 10 years = $30k

Both properties appreciate the same based on $100k in property value

Option #2b - 20% DP; financed = $80k times 5 properties (using the same $100k)
Cost = $20k/property = $100k
Equity = $20k/property = $100k
CF/Yr = $5k/property = $25k (5 propertis)
# yrs to recovery of cost = 4...all 5 are recovering simultaneously 
Profit after 10 years = $150k

All 5 properties appreciate the same, but the total appreciation is now based on $500k in property value, meaning you would be gaining appreciation 5 times faster than the first 2 Options.

See this reply in the discussion

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  • Investor · Indianapolis, IN · Member since 2015 · 393 posts · 116 votes
    6y
    Originally posted by @Joe Villeneuve:
    Originally posted by @Account Closed:

    @Joe Villeneuve I am curious what kind of reserves you’d recommend carrying under the last scenario. If I’m hold $500k in properties at 20% equity each and let’s say the cash flow $100 each.... what’s a reasonable amount of reserve funds? Is it a percentage of overall property value? Percentage of total PITIA? A multiple of total PITIA? A number of months PITIA?

     1 - I don't buy properties that only have $100/month in CF.  That's financial suicide.  They must have at least $4-500/month, or I won't even look at them.

    2 - I could be holding just one property.  The number of properties in my example (as I explained later above) is just a way of showing the exponential expansion on the total dollar amount.

    3 - I don't deal in percentages since they lie.  Why would I hold back 10% of the rent (rent = $1250; hold back = $125/month), with the idea of protecting me for when the $%&##$ hits the fan (vacancy, roof replacement, HVAC replacement, etc...) when the actual dollar amount retained has no chance in the world of covering any of those items when they happen...especially if more than one happens at once.

    I prefer to be proactive in those items, and use a large LOC that's available from the beginning to cover those items if/when they happen.

    An example of a proactive solution, that actually make me money, would be to replace the roof when I buy the property.  Why?  Here's why:

    1 - If I wait until the roof leaks (and causes all kinds of problems for me and the tenant), it will cost me at least $5k to replace.  This is money that is out of pocket to me and adds to the overall cost that I end up paying for the property, that I need to recover before I start making a profit again.

    2 - If I replace it when I buy the property, I can bury it in the initial financing.  $5k at 4% for 30 years is only $24/month, or less than $300/yr.  That money comes from the tenant in the form of rent.

    3 - If I sell the property after 3 - 5 years (say 5), the roof didn't cost me $5k...it only cost me less than $1500 in reduced cash flow.

    4 - When I list the property, it's listed with a new roof that was replaced within the last 5 years (meaning still under warranty).

    5 - Do you think I can list the property for at least an extra $5k...meaning the roof didn't cost me anything, and actually made me money in the long run.

    Jim Leyland has said many times regarding playing baseball games against the top teams that, "it isn't necessarily who you play, but when you play them".  The same mentality can be applied here.  "It isn't how much it costs, but how you pay for it".

    Agree with your 3rd point and really love the LOC idea. I'm doing that right now with a rental but not for "Oh s***" moments, but to have liquidity available for the coming year to buy more. On that note, do you know if lenders do commercial LOC's with RE as collateral that are longer than a year? (personal residence helocs differing here...)

    Also, that roof idea is solid! Appreciate the nugget!

  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Jonathan R McLaughlin:

    @Joe Villeneuve well trod ground here and and agreeing with you that denying the power of leverage to build a portfolio is insane. I do math the same way. To be fair, though, in your first example you stopped the math just before a key point: the exit.

    Let’s say there was no real appreciation other than maybe inflation (and that gets wiped out by commissions yada yada) so you get back exactly your purchase price. You hold the property for 5 years.

    In our simplified model Property one with all cash purchase will return 50% or 10% a year over the 5 years assuming you recoup the original investment and no more.

    Property two with the down payment of 20% on a value of 100k gets 5 years of 5k cash return for 25k and 5 years of pay down which I’m ballparking at another 10k. So thats 35k over 5 on an investment of 20k 160% over 5 or 32% a year.

    CLEARLY better but unadjusted for risk. 10% is nothing to sneeze at in a world where the risk baseline of the ten year t note is less than 1% and a savings account pays essentially nothing. Where A diversified portfolio has hedges against risk in a variety of forms, real estate, stocks etc. gold has often been bought for safety vs return. And people don’t like keeping uninsured accounts in multiple banks anyway.

    So if you are cash and asset heavy and love real estate you can certainly smartly use all cash purchases in that way, just realize it’s a decently yielding savings account and inflation hedge not a true growth investment.

    Why am I going over something you clearly know? Because I think many people starting out intuitively understand the safety of cash purchases but misapply it to their small portfolio business. And in the scale I’m talking we are almost all small.

    Cash only purchases really dont have much place until you don’t have options on where to safely put your money. We have been in a crazy search for yield at the global level with worldwide rates so low and so cash for real estate for the big boys and gals (talking 7/8/9 figures here) became BOTH a profit center and a safety play. Nice trick.

    There's a reason why I never use percentages as comparison numbers...they lie...they tell me nothing.  I'll use them to get the answer, but the final answer will always be in the form of $$$$$.

  • Investor · Indianapolis, IN · Member since 2015 · 393 posts · 116 votes
    6y
    Originally posted by @John W.:

    @Alain Perez-Majul always work to be as debt free as possible, I don't care what others say, debt is your #1 risk

     Actually, it's really the other way around. Well calculated debt is not your risk- it's the lenders. Your EQUITY is your risk. The more levered you are, the riskier position the bank is in, not you (of course, I'm not saying here that you should leverage the most you possibly can). But I understand what you're getting at. 

    I've always liked the quote:

    "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."

  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Alain Perez-Majul:
    Originally posted by @Joe Villeneuve:
    Originally posted by @Account Closed:

    @Joe Villeneuve I am curious what kind of reserves you’d recommend carrying under the last scenario. If I’m hold $500k in properties at 20% equity each and let’s say the cash flow $100 each.... what’s a reasonable amount of reserve funds? Is it a percentage of overall property value? Percentage of total PITIA? A multiple of total PITIA? A number of months PITIA?

     1 - I don't buy properties that only have $100/month in CF.  That's financial suicide.  They must have at least $4-500/month, or I won't even look at them.

    2 - I could be holding just one property.  The number of properties in my example (as I explained later above) is just a way of showing the exponential expansion on the total dollar amount.

    3 - I don't deal in percentages since they lie.  Why would I hold back 10% of the rent (rent = $1250; hold back = $125/month), with the idea of protecting me for when the $%&##$ hits the fan (vacancy, roof replacement, HVAC replacement, etc...) when the actual dollar amount retained has no chance in the world of covering any of those items when they happen...especially if more than one happens at once.

    I prefer to be proactive in those items, and use a large LOC that's available from the beginning to cover those items if/when they happen.

    An example of a proactive solution, that actually make me money, would be to replace the roof when I buy the property.  Why?  Here's why:

    1 - If I wait until the roof leaks (and causes all kinds of problems for me and the tenant), it will cost me at least $5k to replace.  This is money that is out of pocket to me and adds to the overall cost that I end up paying for the property, that I need to recover before I start making a profit again.

    2 - If I replace it when I buy the property, I can bury it in the initial financing.  $5k at 4% for 30 years is only $24/month, or less than $300/yr.  That money comes from the tenant in the form of rent.

    3 - If I sell the property after 3 - 5 years (say 5), the roof didn't cost me $5k...it only cost me less than $1500 in reduced cash flow.

    4 - When I list the property, it's listed with a new roof that was replaced within the last 5 years (meaning still under warranty).

    5 - Do you think I can list the property for at least an extra $5k...meaning the roof didn't cost me anything, and actually made me money in the long run.

    Jim Leyland has said many times regarding playing baseball games against the top teams that, "it isn't necessarily who you play, but when you play them".  The same mentality can be applied here.  "It isn't how much it costs, but how you pay for it".

     Joe, where are you finding properties that cash flow $500 a door? These must be in markets where the rents are decently high to even allow it to be a remote possibility. But even then, those markets then typically also have high price points, which will significantly affect your cash flow in the event there's debt thrown in the deal. The only other way I can think of is buying a home run from the get-go (ie significantly under market value) where debt service (plus additional expenses to factor) to monthly rent allows that to pencil out. 

    Typical Indy example (class B property, late 90's, 00's vinyl village):

    PP:    $120,000

    Rent:    $1,200

    Taxes (assuming same assessed value):   $200/month

    Loan: $96k (80% LTV) @ 4%, 30 years.... PI of $458/month

    PM (10%):    $120/month

    Vacancy/maintenance (15%?):    $180/month

    We're looking at $960 going out a month, or cash flow of $240 (with the assumption the above numbers are fair, which, other than vacancy and maintenance, one can't argue the rest- and I might've been aggressive on the commercial 30 year interest) - all of this in Indy, a city renown for good cash flow given its cheap real estate. 

    How are you hitting $400-$500 minimum cash flow per unit (if indeed you turn deals away if they don't meet this cash flow)?? 

     Local.  Many markets.  It takes good analysis, good offers/strategies, and good terms.

  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Alain Perez-Majul:

    @Joe Villeneuve wait, perhaps I spoke too soon. Were you including debt pay down, write-offs, and appreciation in the monthly cash flow calculation?

     Debt paydown woul reduce cash flow.

    Write offs don't involve cash.

    Appreciation is virtual, and is cash that is locked up and doesn't "flow"...so no to all three.

  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Alain Perez-Majul:
    Originally posted by @Joe Villeneuve:
    Originally posted by @Account Closed:

    @Joe Villeneuve I am curious what kind of reserves you’d recommend carrying under the last scenario. If I’m hold $500k in properties at 20% equity each and let’s say the cash flow $100 each.... what’s a reasonable amount of reserve funds? Is it a percentage of overall property value? Percentage of total PITIA? A multiple of total PITIA? A number of months PITIA?

     1 - I don't buy properties that only have $100/month in CF.  That's financial suicide.  They must have at least $4-500/month, or I won't even look at them.

    2 - I could be holding just one property.  The number of properties in my example (as I explained later above) is just a way of showing the exponential expansion on the total dollar amount.

    3 - I don't deal in percentages since they lie.  Why would I hold back 10% of the rent (rent = $1250; hold back = $125/month), with the idea of protecting me for when the $%&##$ hits the fan (vacancy, roof replacement, HVAC replacement, etc...) when the actual dollar amount retained has no chance in the world of covering any of those items when they happen...especially if more than one happens at once.

    I prefer to be proactive in those items, and use a large LOC that's available from the beginning to cover those items if/when they happen.

    An example of a proactive solution, that actually make me money, would be to replace the roof when I buy the property.  Why?  Here's why:

    1 - If I wait until the roof leaks (and causes all kinds of problems for me and the tenant), it will cost me at least $5k to replace.  This is money that is out of pocket to me and adds to the overall cost that I end up paying for the property, that I need to recover before I start making a profit again.

    2 - If I replace it when I buy the property, I can bury it in the initial financing.  $5k at 4% for 30 years is only $24/month, or less than $300/yr.  That money comes from the tenant in the form of rent.

    3 - If I sell the property after 3 - 5 years (say 5), the roof didn't cost me $5k...it only cost me less than $1500 in reduced cash flow.

    4 - When I list the property, it's listed with a new roof that was replaced within the last 5 years (meaning still under warranty).

    5 - Do you think I can list the property for at least an extra $5k...meaning the roof didn't cost me anything, and actually made me money in the long run.

    Jim Leyland has said many times regarding playing baseball games against the top teams that, "it isn't necessarily who you play, but when you play them".  The same mentality can be applied here.  "It isn't how much it costs, but how you pay for it".

    Agree with your 3rd point and really love the LOC idea. I'm doing that right now with a rental but not for "Oh s***" moments, but to have liquidity available for the coming year to buy more. On that note, do you know if lenders do commercial LOC's with RE as collateral that are longer than a year? (personal residence helocs differing here...)

    Also, that roof idea is solid! Appreciate the nugget!

    Uncollateralized loans. Business LOC's.

  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Alain Perez-Majul:
    Originally posted by @John W.:

    @Alain Perez-Majul always work to be as debt free as possible, I don't care what others say, debt is your #1 risk

     Actually, it's really the other way around. Well calculated debt is not your risk- it's the lenders. Your EQUITY is your risk. The more levered you are, the riskier position the bank is in, not you (of course, I'm not saying here that you should leverage the most you possibly can). But I understand what you're getting at. 

    I've always liked the quote:

    "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."

    100% correct.  That's why lenders don't give out 100% loans.

    There are 3 parts to risk:

    1 - What is at risk = Cash

    2 - Who is at risk = Lender

    3 - Who is the risk = Borrower

    Not sure of who's who?  Follow the money flow.  It always travels/points from the person at risk to the person that is the risk.

  • Investor · Indianapolis, IN · Member since 2015 · 393 posts · 116 votes
    6y
    Originally posted by @Joe Villeneuve:
    Originally posted by @Alain Perez-Majul:
    Originally posted by @Joe Villeneuve:
    Originally posted by @Account Closed:

    @Joe Villeneuve I am curious what kind of reserves you’d recommend carrying under the last scenario. If I’m hold $500k in properties at 20% equity each and let’s say the cash flow $100 each.... what’s a reasonable amount of reserve funds? Is it a percentage of overall property value? Percentage of total PITIA? A multiple of total PITIA? A number of months PITIA?

     1 - I don't buy properties that only have $100/month in CF.  That's financial suicide.  They must have at least $4-500/month, or I won't even look at them.

    2 - I could be holding just one property.  The number of properties in my example (as I explained later above) is just a way of showing the exponential expansion on the total dollar amount.

    3 - I don't deal in percentages since they lie.  Why would I hold back 10% of the rent (rent = $1250; hold back = $125/month), with the idea of protecting me for when the $%&##$ hits the fan (vacancy, roof replacement, HVAC replacement, etc...) when the actual dollar amount retained has no chance in the world of covering any of those items when they happen...especially if more than one happens at once.

    I prefer to be proactive in those items, and use a large LOC that's available from the beginning to cover those items if/when they happen.

    An example of a proactive solution, that actually make me money, would be to replace the roof when I buy the property.  Why?  Here's why:

    1 - If I wait until the roof leaks (and causes all kinds of problems for me and the tenant), it will cost me at least $5k to replace.  This is money that is out of pocket to me and adds to the overall cost that I end up paying for the property, that I need to recover before I start making a profit again.

    2 - If I replace it when I buy the property, I can bury it in the initial financing.  $5k at 4% for 30 years is only $24/month, or less than $300/yr.  That money comes from the tenant in the form of rent.

    3 - If I sell the property after 3 - 5 years (say 5), the roof didn't cost me $5k...it only cost me less than $1500 in reduced cash flow.

    4 - When I list the property, it's listed with a new roof that was replaced within the last 5 years (meaning still under warranty).

    5 - Do you think I can list the property for at least an extra $5k...meaning the roof didn't cost me anything, and actually made me money in the long run.

    Jim Leyland has said many times regarding playing baseball games against the top teams that, "it isn't necessarily who you play, but when you play them".  The same mentality can be applied here.  "It isn't how much it costs, but how you pay for it".

     Joe, where are you finding properties that cash flow $500 a door? These must be in markets where the rents are decently high to even allow it to be a remote possibility. But even then, those markets then typically also have high price points, which will significantly affect your cash flow in the event there's debt thrown in the deal. The only other way I can think of is buying a home run from the get-go (ie significantly under market value) where debt service (plus additional expenses to factor) to monthly rent allows that to pencil out. 

    Typical Indy example (class B property, late 90's, 00's vinyl village):

    PP:    $120,000

    Rent:    $1,200

    Taxes (assuming same assessed value):   $200/month

    Loan: $96k (80% LTV) @ 4%, 30 years.... PI of $458/month

    PM (10%):    $120/month

    Vacancy/maintenance (15%?):    $180/month

    We're looking at $960 going out a month, or cash flow of $240 (with the assumption the above numbers are fair, which, other than vacancy and maintenance, one can't argue the rest- and I might've been aggressive on the commercial 30 year interest) - all of this in Indy, a city renown for good cash flow given its cheap real estate. 

    How are you hitting $400-$500 minimum cash flow per unit (if indeed you turn deals away if they don't meet this cash flow)?? 

     Local.  Many markets.  It takes good analysis, good offers/strategies, and good terms.

     That's fair. I clearly made assumptions in regards to the structure of your deals. Also, I see you're essentially in Detroit ("Local."). I hear things are actually pretty hot up there, contrary to stereotype. Likely a good place to cash flow, much like Indy.

    Vague, though, so you hooked me. Might have to bother you later and pick your brain hahaha

  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Alain Perez-Majul:
    Originally posted by @Joe Villeneuve:
    Originally posted by @Alain Perez-Majul:
    Originally posted by @Joe Villeneuve:
    Originally posted by @Account Closed:

    @Joe Villeneuve I am curious what kind of reserves you’d recommend carrying under the last scenario. If I’m hold $500k in properties at 20% equity each and let’s say the cash flow $100 each.... what’s a reasonable amount of reserve funds? Is it a percentage of overall property value? Percentage of total PITIA? A multiple of total PITIA? A number of months PITIA?

     1 - I don't buy properties that only have $100/month in CF.  That's financial suicide.  They must have at least $4-500/month, or I won't even look at them.

    2 - I could be holding just one property.  The number of properties in my example (as I explained later above) is just a way of showing the exponential expansion on the total dollar amount.

    3 - I don't deal in percentages since they lie.  Why would I hold back 10% of the rent (rent = $1250; hold back = $125/month), with the idea of protecting me for when the $%&##$ hits the fan (vacancy, roof replacement, HVAC replacement, etc...) when the actual dollar amount retained has no chance in the world of covering any of those items when they happen...especially if more than one happens at once.

    I prefer to be proactive in those items, and use a large LOC that's available from the beginning to cover those items if/when they happen.

    An example of a proactive solution, that actually make me money, would be to replace the roof when I buy the property.  Why?  Here's why:

    1 - If I wait until the roof leaks (and causes all kinds of problems for me and the tenant), it will cost me at least $5k to replace.  This is money that is out of pocket to me and adds to the overall cost that I end up paying for the property, that I need to recover before I start making a profit again.

    2 - If I replace it when I buy the property, I can bury it in the initial financing.  $5k at 4% for 30 years is only $24/month, or less than $300/yr.  That money comes from the tenant in the form of rent.

    3 - If I sell the property after 3 - 5 years (say 5), the roof didn't cost me $5k...it only cost me less than $1500 in reduced cash flow.

    4 - When I list the property, it's listed with a new roof that was replaced within the last 5 years (meaning still under warranty).

    5 - Do you think I can list the property for at least an extra $5k...meaning the roof didn't cost me anything, and actually made me money in the long run.

    Jim Leyland has said many times regarding playing baseball games against the top teams that, "it isn't necessarily who you play, but when you play them".  The same mentality can be applied here.  "It isn't how much it costs, but how you pay for it".

     Joe, where are you finding properties that cash flow $500 a door? These must be in markets where the rents are decently high to even allow it to be a remote possibility. But even then, those markets then typically also have high price points, which will significantly affect your cash flow in the event there's debt thrown in the deal. The only other way I can think of is buying a home run from the get-go (ie significantly under market value) where debt service (plus additional expenses to factor) to monthly rent allows that to pencil out. 

    Typical Indy example (class B property, late 90's, 00's vinyl village):

    PP:    $120,000

    Rent:    $1,200

    Taxes (assuming same assessed value):   $200/month

    Loan: $96k (80% LTV) @ 4%, 30 years.... PI of $458/month

    PM (10%):    $120/month

    Vacancy/maintenance (15%?):    $180/month

    We're looking at $960 going out a month, or cash flow of $240 (with the assumption the above numbers are fair, which, other than vacancy and maintenance, one can't argue the rest- and I might've been aggressive on the commercial 30 year interest) - all of this in Indy, a city renown for good cash flow given its cheap real estate. 

    How are you hitting $400-$500 minimum cash flow per unit (if indeed you turn deals away if they don't meet this cash flow)?? 

     Local.  Many markets.  It takes good analysis, good offers/strategies, and good terms.

     That's fair. I clearly made assumptions in regards to the structure of your deals. Also, I see you're essentially in Detroit ("Local."). I hear things are actually pretty hot up there, contrary to stereotype. Likely a good place to cash flow, much like Indy.

    Vague, though, so you hooked me. Might have to bother you later and pick your brain hahaha

     Why wait.  Pick it now.  PM me.

  • Dallas, TX · Member since 2020 · 26 posts · 18 votes
    6y

    @Alain Perez-Majul

    I’m curious as to why it isn’t your problem if you owe the bank $100 million (I know the amount is in jest, but using your quote).

    I’ve heard this said before but it makes no sense to me. If you are on the hook and personally backstop the debt on a recourse loan, you are putting all of your finances at risk. I guess you could get lucky and have the bank not come after you for the deficiency, but they certainly could. Especially if you have other significant assets (which in my opinion you should if you are investing in rental properties at all).

    What am I missing?

  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Marc Rose:

    @Alain Perez-Majul

    I’m curious as to why it isn’t your problem if you owe the bank $100 million (I know the amount is in jest, but using your quote).

    I’ve heard this said before but it makes no sense to me. If you are on the hook and personally backstop the debt on a recourse loan, you are putting all of your finances at risk. I guess you could get lucky and have the bank not come after you for the deficiency, but they certainly could. Especially if you have other significant assets (which in my opinion you should if you are investing in rental properties at all).

    What am I missing?

    ASset protection.

    Ask yourself these questions:

    1  What would make the bank come after you?  

    2 - What is the only connection between you and the lender?  

    3 - What is the collateralization for?

    4 - What makes the property vulnerable?

    5 - What is the true asset in your property?

    6 - What is "at risk" to you when you own a property?

  • Flipper/Rehabber · Decatur, GA · Member since 2020 · 5 posts · 3 votes
    6y

    @Alain Perez-Majul I'm following very interesting

  • Real Estate Agent · Commerce CIty, CO · Member since 2018 · 127 posts · 78 votes
    6y

    Its gotta be a happy medium. Clearing $100 a month on a property isn't sustainable no matter what anyone says. I believe in larger down payments to reduce the monthly mortgage. But people have made millions taking debt up to the gills. 

  • Fort Lauderdale, FL · Member since 2016 · 27 posts · 11 votes
    6y

    From what I've heard, debt burden is a friend in asset protection. Based on what I've heard from Brandon Turner and Clint Coons from Anderson Business Advisors, leverage on a property offers protection against lawsuits by making you an unattractive target. For example, if you're 200k property has 40k of equity in it and a 100k liability policy, attornies will weigh going to trial for a possible 40k or settling for the 100k insurance policy. I haven't been in the situation myself, but it sounds logical.

  • Dallas, TX · Member since 2020 · 26 posts · 18 votes
    6y

    @Joe Villeneuve

    Thanks for the response. I’m not sure I follow the reasoning here, but I’m new to these forums, so maybe I’m still missing something. So a lender with a mortgage absolutely has the home as collateral, and they lend on that basis. But the borrower is liable for the mortgage amount, regardless of the collateral value. Now maybe the point people are making is that a lender is unlikely to go after the borrower for any deficiency - and people may point to 2008/9 when people were walking away from their homes and lenders weren’t bothering to go after many individuals. But I don’t think this means banks can’t. And I’m not sure why they wouldn’t if they had a borrower with significant assets.

    I guess my point is it makes no sense to say that putting less down is safer because you have less at risk. You don’t legally have less at risk by putting less money down. In fact, the less you put down and the more you borrow, the more you owe, and therefore you have more at risk.

  • Member since 2020 · 3 posts · 1 vote
    6y

    @Joe Villeneuve

    Greetings Joe, I love your outlook on investing and am currently trying to deploy a similar strategy with my first property by owner occupying a four family.

    When you mention not letting equity sit, are you referring to a HELOC or refinance or both or something else?

    I have relatively little income, so I have to make all my cash/equity work for me.

    Thanks for your input, I have been reading your comments for what seems like years.

  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Marc Rose:

    @Joe Villeneuve

    Thanks for the response. I’m not sure I follow the reasoning here, but I’m new to these forums, so maybe I’m still missing something. So a lender with a mortgage absolutely has the home as collateral, and they lend on that basis. But the borrower is liable for the mortgage amount, regardless of the collateral value. Now maybe the point people are making is that a lender is unlikely to go after the borrower for any deficiency - and people may point to 2008/9 when people were walking away from their homes and lenders weren’t bothering to go after many individuals. But I don’t think this means banks can’t. And I’m not sure why they wouldn’t if they had a borrower with significant assets.

    I guess my point is it makes no sense to say that putting less down is safer because you have less at risk. You don’t legally have less at risk by putting less money down. In fact, the less you put down and the more you borrow, the more you owe, and therefore you have more at risk.

     What you're missing is the most important aspect here..."what is at risk".  The answer must be something tangible, and is always the same..."cash".  Follow the money.  It will always flow from the person that is "at risk", to the person who is "the risk".

    Now, when you are talking about your own home, that's a different story. Trouble is, many REI try to apply the same principles and mentality of home ownership to REI. They're not the same.

  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Michael Crawford:

    @Joe Villeneuve

    Greetings Joe, I love your outlook on investing and am currently trying to deploy a similar strategy with my first property by owner occupying a four family.

    When you mention not letting equity sit, are you referring to a HELOC or refinance or both or something else?

    I have relatively little income, so I have to make all my cash/equity work for me.

    Thanks for your input, I have been reading your comments for what seems like years.

    First, thanks for your kind comments.  Now I have a request, please tell my wife and daughter these things.  LOL.

    Now, onto why we're here.  I treat equity as if it is your cash that is being held prisoner in your rental property.  I also define the asset as your cash...not the property.  Your property is nothing more than a temporary resting place for your cash until such time when your equity (dead cash) accumulates enough "friends" through appreciation (thank you economy) and principle pay down (thank you tenant/rent) where it has more value outside of that property.

    I then sell the property, and double down on the true value of that equity/cash by investing it into either multiple of bigger properties.  This should occur within a 3 to 5 year period...if you bought correctly in the first place.

  • Rental Property Investor · St. Louis, MO · Member since 2019 · 9 posts · 4 votes
    6y

    @Joe Villeneuve

    Joe. I don't know if it's because your blunt or you're just a wise real estate sage, but this is the most beneficial and interesting discussion I've ever heard, especially about equity being basically the same as useless cash until it's able to be mobilized.

    I hope to have such a simple, strategic, objective, and successful outlook on real estate In a few years after I gain more experience.

  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Jason Cacioppo:

    Its gotta be a happy medium. Clearing $100 a month on a property isn't sustainable no matter what anyone says. I believe in larger down payments to reduce the monthly mortgage. But people have made millions taking debt up to the gills. 

     I agree completely about the $100/month not being sustainable.  

    Larger DP's don't really increase cash flow...they just kick the can down the road by "buying" the added cash flow you are getting "on paper" upfront...or worse, paying for the negative cash flow upfront.  That's not the same thing as true cash flow.

  • Rental Property Investor · St. Louis, MO · Member since 2019 · 9 posts · 4 votes
    6y

    @Joe Villeneuve

    I have a question Joe. I am under contract for a rural 4 family. Because it's rural, I'm assuming that it's going to appreciate slower. I also am probably not buying it "right".

    I am buying it because I can't find any other places to owner occupy that cover the rent AND cash flow decently when I move out.

    Couple questions: does my situation just mean that the 3 to 5 time period would be pushed back to even longer (low appreciation, not buying it "right", living in one unit for a year)

    I was considering investing in the surrounding rural areas because it's less competitive, would you recommend against that?

    I am anxious because even though one bad deal is a learning lesson, I am a teacher and don't have a ton of money in the first place.

    I want to get all my money to work for me in the best way possible.

    Anyway, thanks again for your awesome insight! It's unlike any of seen on other forums/podcasts/channels.

  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Micah Young:

    @Joe Villeneuve

    I have a question Joe. I am under contract for a rural 4 family. Because it's rural, I'm assuming that it's going to appreciate slower. I also am probably not buying it "right".

    I am buying it because I can't find any other places to owner occupy that cover the rent AND cash flow decently when I move out.

    Couple questions: does my situation just mean that the 3 to 5 time period would be pushed back to even longer (low appreciation, not buying it "right", living in one unit for a year)

    I was considering investing in the surrounding rural areas because it's less competitive, would you recommend against that?

    I am anxious because even though one bad deal is a learning lesson, I am a teacher and don't have a ton of money in the first place.

    I want to get all my money to work for me in the best way possible.

    Anyway, thanks again for your awesome insight! It's unlike any of seen on other forums/podcasts/channels.

     I really can't answer your question without specifics.  You can PM me to give it to me so you can keep what you don't want public still private...more or less.

  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    6y

    Yes.

    The answer depends on one's individual goals. I am leveraged, but most my properties have about 40% - 50% equity. As I purchase new property, I try to start with at least 30% equity.

    Eventually, I will want them all paid off. Why? Because I won't care about growth as much as security. Owning properties free-and-clear reduces risk, simplifies my life, and meets my financial goals.

    As life changes, so will my goals and strategies.

    The DIY Landlord Book4.7248 Reviews
  • Rental Property Investor · Buffalo, NY · Member since 2017 · 257 posts · 130 votes
    6y

    Originally posted by @Alain Perez-Majul:
    Originally posted by @John W.:

    @Alain Perez-Majul always work to be as debt free as possible, I don't care what others say, debt is your #1 risk

     Actually, it's really the other way around. Well calculated debt is not your risk- it's the lenders. Your EQUITY is your risk. The more levered you are, the riskier position the bank is in, not you (of course, I'm not saying here that you should leverage the most you possibly can). But I understand what you're getting at. 

    I've always liked the quote:

    "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." 

    Only in an upside down world do people start believing that debt is good and safe and that not owning something is preferable. 

  • Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    6y

    My questions when looking at finance would be:

    1) If I go with high LTV, do I have POSITIVE CFBT in case of an emergency? You want your investment to stand on its own and not suck up money from outside of the investment.

    2) If I do borrow money, for each $1 I borrow at x% rate can I make x+% return?  There is nothing wrong with debt if you manage it and use it properly.  

    I understand the Dave Ramsay fans totally about ZERO debt and the "sleep" factor- That works for 80% of the population that doesn't manage debt well.  However, to grow wealth, your best tool is the leverage of OPM.

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