Buying duplex at 100% LTV! Over-Leveraging or Good Deal?

General Landlording & Rental Properties
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Buying duplex at 100% LTV! Over-Leveraging or Good Deal?

Nick Wilkinson
Member since 2018 · 7 posts · 3 votes

Hello all,


I am currently the owner of 2 duplexes, 1 conversion and 1 side-by-side. The conversion was purchased using a down payment of 20% and cash flows $525/m. The side-by-side was purchased 100% LTV (zero percent down) and cash flows about $400/m. Obviously, this means my cash-on-cash return is infinity but I started with zero equity in the property and have to build it over the long term. The bank was willing to loan me 100% of the property value because my dad has built a very good relationship with them over the last 20 years through his construction business. I recently spoke to the loan officer and he said he would be willing to do this again.

Should I keep taking advantage of the 100% LTV and low-interest rates or is this "over-leveraging" too risky? Any advice would be appreciated.

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Brian G.
Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
6y

@Nick Wilkinson it's not the LTV that poses the greatest risk in RE, it is a lack of liquidity. By example, if I owned 5 properties at 100%LTV worth $1M but had $1M cash in the bank then my risk is extremely low. This example is an exaggeration to make a point: being well capitalized is more important than your %LTV.

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  • Account Closed
    Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes
    6y

    Depends on the terms of the loan .. what are they??

    0Reply
  • Nick Wilkinson
    OP
    Member since 2018 · 7 posts · 3 votes
    6y

    @Account Closed They said they would be willing to finance 100% with a 20 year am and 4.375% interest rate fixed for 5 years.

    The current 100% financed loan is a 30 year am.

    0Reply
  • Account Closed
    Member since 2019 · 1k+ posts · 1k+ votes
    6y

    @Nick Wilkinson

    This is, was, and always will be a horrible idea.

    0Reply
  • Nick Wilkinson
    OP
    Member since 2018 · 7 posts · 3 votes
    6y

    Thanks for the valuable insight @Account Closed

    0Reply
  • Remington LymanBusiness Member
    Real Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
    6y
    Originally posted by @Nick Wilkinson:

    Hello all,


    I am currently the owner of 2 duplexes, 1 conversion and 1 side-by-side. The conversion was purchased using a down payment of 20% and cash flows $525/m. The side-by-side was purchased 100% LTV (zero percent down) and cash flows about $400/m. Obviously, this means my cash-on-cash return is infinity but I started with zero equity in the property and have to build it over the long term. The bank was willing to loan me 100% of the property value because my dad has built a very good relationship with them over the last 20 years through his construction business. I recently spoke to the loan officer and he said he would be willing to do this again.

    Should I keep taking advantage of the 100% LTV and low-interest rates or is this "over-leveraging" too risky? Any advice would be appreciated.

     I would leverage up. Rates are so low it is free money

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

    "Should I keep taking advantage of the 100%LTV and low-interest rates or is this "over-leveraging" too risky?"

    I'd look at each deal and make reasonable assumptions on:

    1) Growth in value (goes to equity)

    2) Growth in income/expenses (goes to NOI)

    3) Upon close (assuming it'll get better over time), your DCR (=NOI/debtpmt) is > 1.25

    I think to start biggest issue is to make sure you CFBT is enough to build an emergency fund.

    You're fortunate to be able to get a relationship loan at a decent rate.

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