HELP!!! My financial advisor said I'm over leveraged
Investor · Dallas, TX · Member since 2021 · 24 posts · 28 votes
HELP!!! My financial advisor said I'm over leveraged
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Real Estate Investor · Unadilla NY · Member since 2017 · 418 posts · 297 votes
5yTell him no problem and drop him and his fees, then you wont be leveraged as bad. I'm 90 percent serious about this. For a quarter of what your paying him hire me and I'll tell you twice as frequently you don't have enough money.
You could sell some of your properties to be less leveraged and make less cash flow.
You could really vet your tenants to make sure they don't screw you over.
You can hold ample reserves of cash for the "what if" scenarios.
Get a HELOC if you don't have it already and use it if you have to.
Take out a blanket mortgage and tap some of your equity to pay a property or two off free and clear. Stick those in a separate LLC so if the world does come crashing down you won't have to lose those in theory.
73 Replies
- Real Estate Investor · Unadilla NY · Member since 2017 · 418 posts · 297 votes5y
Tell him no problem and drop him and his fees, then you wont be leveraged as bad. I'm 90 percent serious about this. For a quarter of what your paying him hire me and I'll tell you twice as frequently you don't have enough money.
You could sell some of your properties to be less leveraged and make less cash flow.
You could really vet your tenants to make sure they don't screw you over.
You can hold ample reserves of cash for the "what if" scenarios.
Get a HELOC if you don't have it already and use it if you have to.
Take out a blanket mortgage and tap some of your equity to pay a property or two off free and clear. Stick those in a separate LLC so if the world does come crashing down you won't have to lose those in theory.
- Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes5y
What are the details? How much are you places cash flowing? How much do you have in reserves, and how long could these cover a high vacancy rate? These are relevant questions.
- Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes5y
Have another discussion. Talk about how much is in real estate, how much in other investments, what are their returns, what are their risks. Real estate can crash, tenants can destroy your property, not pay rent, not move out, cost of property can boom or bust. But so can the stock market.
Personally, I think that diversity is needed. RE can cover some of the funding needs when stocks are down and stocks can cover the RE when RE is not preforming. But what if they both crash at once, can you make it or will you loose everything? Only you and your financial manager knows how you stand overall, the level of risk you want to take, your ability to recover.
It likely took him a lot of thought to figure out what to say to you and how to say it. Likely he has a concern that you may loose everything. If you are ok with that (young, well employed, etc.) tell him. If you are not ok with that, discuss options, different ratios in each investment type.
I have these types of discussions with my FM. He is in CA and I am in TN. He wants to come out to see my historical rentals, and will sometime later this year or early next year. He is supportive of diversity. And of learning more about what I like doing. As you get to know each other better and build that relationship you can each communicate and manage your finances better.
Financial Managers are a very important part of your 'team' and you really should give great consideration to their concerns. Everyone can find a cheerleader to say 'go for it, all is well'. It takes more for someone to say, let's look at this, maybe we need to make some different allotments into the investment groups.
- 5yJohn UnderwoodPro MemberInvestor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
There is more information that we would need as @Eric James mentioned.
He could be correct, he may be way off base.
I have heard from multiple sources that this is not a bubble that this is the new normal.
I prefer to buy inexpensive distresses properties for cash, fix them up with cash and then be able to rent them out for $1000 or more per month. They pay off my investment pretty quick and I do it again. I Love doing this in my ROTH IRA so that this is tax free. I'll get a huge tax free raise when I retire.
Occasionally I'll do this outside my IRA to give me a raise now, but it's taxable. :(
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes5y
Originally posted by @Idris Haroon:
So I just got off the phone with my financial advisor and he said I'm doing well but he's concerned I'm over leveraged on real estate. He's concerned that if we experience another recession that I will be stuck holding the bag for all the mortgages on my rental properties. Is anyone else concerned about this? If so how are you planning ahead to make sure this isn't a problem if we experience another recession and your tenants cant pay rent?
Thanks
Do your properties cash flow? If so, it doesn't really matter if there's a recession. You keep collecting rent, paying your mortgage, and collecting the cash flow. Your equity could drop from 40% to 10% and it won't affect your cash flow one bit. Hold on to the property and it will eventually bounce back and recover all your equity and then some.
If you're already cash flowing and this is his advice, you may want to find a different financial advisor that understands real estate.
The DIY Landlord Book4.7248 Reviews - 5yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
As others mentioned what do your numbers look like on the properties? I just got a new place and when the bank ran my numbers, they insisted on adding expenses (e.g. heat) that the tenants clearly pay, but it is standard for them to include. I plan on holding my places for another 10 years and then will revisit them. So if the price goes down a bit, that's fine.
What matters is the price when you sell and you can delay when you want to sell. Finding tenants shouldn't be a problem because if the economy goes down a bit, fewer people will be able to buy homes and everyone needs a place to live. If you have high end rentals, then it might be a bit of a problem, but for most, it won't be.
- 5yJon KellyPro MemberInvestor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
@Idris Haroon do you think he's right? Ask him to walk you through a scenario in which this would happen using REAL numbers. He could be right, but it's not enough to say "oh, well, if there's a crash you could be in trouble..."
I'll bet he suggests selling your properties and investing in mutual funds through his firm for a small annual fee...
As other posts suggest, the most important thing is cashflow. If the properties cashflow their values are almost irrelevant. A lot of people will argue if there is a recession it will only help rental properties because more people will rent than own.
Consider looking for another financial advisor with expertise in real estate.
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
in certain markets with certain asset class's i would agree with the financial advisor 80% debt in C class none appreciating markets IE I ONLY BUY FOR CASH flow does hold some risk no doubt.
Keep in mind in a Very bad recession rents can and do stop.. then what.. if your over leveraged your in trouble on the cash flow side forget about equity its gone.
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Jon Kelly:
@Idris Haroon do you think he's right? Ask him to walk you through a scenario in which this would happen using REAL numbers. He could be right, but it's not enough to say "oh, well, if there's a crash you could be in trouble..."
I'll bet he suggests selling your properties and investing in mutual funds through his firm for a small annual fee...
As other posts suggest, the most important thing is cashflow. If the properties cashflow their values are almost irrelevant. A lot of people will argue if there is a recession it will only help rental properties because more people will rent than own.
Consider looking for another financial advisor with expertise in real estate.
Ok lets talk about people that actually invested and lived through the last GFC .. not a lot of those on BP most of these folks are POST GFC and spew out the same line.. if it cash flows no problem..
Now I am not predicting this in any way.. but if there is a large financial calamity rents will stop in many markets.. and landlords will lose properties if they are over leveraged.. Hundreds of thousands of landlords failed in the GFC I know I foreclosed personally on over 250 OOS investors during 08 to 2011.. it happened. So we do need to be fair and balanced here.. And of course not all markets were the same.. Some got killed some hardly had any issues. So its not doom and gloom but its not a guarantee that you will do OK in a bad economic cycle.
- Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes5y
As long as your properties are cash flowing, you should be protected from downturns. Look back at the last downturn and what your properties would have rented for between '09-'11, do you still cash flow? If not, perhaps make a move to pay some off.
Also, before doing anything, I'd be curious if your advisor owns any property. Before I got into real estate, I had so many people tell me that it was a mistake... all those people never owned property. And RE investing has been the best financial decision I've ever made.
All things considered, I think it can still be valuable to get diversified into stocks and index/mutual funds.
- 5yJon KellyPro MemberInvestor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
@Jay Hinrichs we're saying similar things. I'm suggesting the financial advisor could be right and he should walk through scenario with real numbers and show the risk. However, cashflow is still the most important thing.
Being overleveraged in 2021 vs. 2007 is totally different.
There's always risk involved and the "what if" scenarios will never go away. That's what keeps a lot of people away from REI.
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Jon Kelly:
@Jay Hinrichs we're saying similar things. I'm suggesting the financial advisor could be right and he should walk through scenario with real numbers and show the risk. However, cashflow is still the most important thing.
Being overleveraged in 2021 vs. 2007 is totally different.
There's always risk involved and the "what if" scenarios will never go away. That's what keeps a lot of people away from REI.
PS I really like Bethlehem and Easton very cool cute towns.. Allentown not so much LOL
- 5yJon KellyPro MemberInvestor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
Originally posted by @Jay Hinrichs:
Originally posted by @Jon Kelly:
@Jay Hinrichs we're saying similar things. I'm suggesting the financial advisor could be right and he should walk through scenario with real numbers and show the risk. However, cashflow is still the most important thing.
Being overleveraged in 2021 vs. 2007 is totally different.
There's always risk involved and the "what if" scenarios will never go away. That's what keeps a lot of people away from REI.
PS I really like Bethlehem and Easton very cool cute towns.. Allentown not so much LOL
Haha, I agree!
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
@Idris Haroon during the last recession, I was invested in real estate and the stock market. My stocks took a major beating. My rental property cash flow increased as rents increased.
One other thing, I fired my financial advisor during that recession. When you dig into the numbers you will find two things:
1. Fees from financial advisors take a significant cut from your growth
2. Investing in index funds, over time, outperforms the majority of actively managed accounts
This comes down to compensation. Most financial advisors make their money on stock transactions and life insurance. You will find that what is "best for you" is actually best for them.
- Member since 2019 · 50 posts · 18 votes5y
If you have the reserves to cover a worst case scenario (as mentioned above) you'll be fine
- 5yScott JensenPro MemberFinancial Advisor · Blaine, MN · Member since 2014 · 477 posts · 387 votes
@Idris Haroon There's no such thing as overleverage. It comes down to cash flow and reserves.
1. Are your properties cash flowing well?
2. Do you have enough in reserves to cover a significant period of vacancy?
If you have good cash flow and sufficient reserves, leverage just increases your returns. You should post some actual details to get feedback as to whether he's right or wrong.
- Real Estate Broker · Rochester Hills, MI · Member since 2009 · 2k+ posts · 2k+ votes5y
@Idris Haroon Oh my, I knew the second I saw this title there would be posts saying drop him, WTF does he know lol. No offense all but what crazy advice here. Idris posted 4 sentences. 81 Words. Not one of those sentences providing an ounce of detail into his holdings or personal situation. His financial advisor (supposedly) has seen all of his finances. But yeah, don't listen to the guy who has seen the data lol.
In the last crash I saw folks who were over leveraged and under cashed lose a lot. I also saw people in that same position gain a lot. I can't comment (and nor can anyone here given the information you provided) on your individual situation but I think your concerns and those of your advisor are great things to be considering.
Also there was a typo in your last sentence it is never "if we experience another recession" is is WHEN. There is always the next one coming because that is part of the cycle we live in.
I think it is excellent strategy to be thinking about and planning for the upcoming cycles so good on you Idris!
- Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes5y
Originally posted by @Jay Hinrichs:
in certain markets with certain asset class's i would agree with the financial advisor 80% debt in C class none appreciating markets IE I ONLY BUY FOR CASH flow does hold some risk no doubt.
Keep in mind in a Very bad recession rents can and do stop.. then what.. if your over leveraged your in trouble on the cash flow side forget about equity its gone.
This is why I love you Jay. Everyone talks about cash flow like it’s guaranteed. Cash flow is one of the hardest things to predict.
The only thing that saves your *** in a downturn is 3 things: low leverage, non-recourse debt, and cash (either from reserves or other income).
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Syed H.:
Originally posted by @Jay Hinrichs:
in certain markets with certain asset class's i would agree with the financial advisor 80% debt in C class none appreciating markets IE I ONLY BUY FOR CASH flow does hold some risk no doubt.
Keep in mind in a Very bad recession rents can and do stop.. then what.. if your over leveraged your in trouble on the cash flow side forget about equity its gone.
This is why I love you Jay. Everyone talks about cash flow like it’s guaranteed. Cash flow is one of the hardest things to predict.
The only thing that saves your *** in a downturn is 3 things: low leverage, non-recourse debt, and cash (either from reserves or other income).
Well just being a contrarian today to the RAW RAW cash flow only BP crowd.. that just started investing in the last 5 to 10 years..
I am not predicting any doom and gloom the point is just because you have cash flow today ..too much debt and too little reserves is over leveraged and investors do that to themselves constantly.. I mean look at the post from folks on BP when pandemic hit and they admitted they could only go 3 to 6 months without rent and would be in trouble with there mortgages those are investors that are too highly leveraged bottom line full stop.. they may not think it and others on BP may not think it or imagine it.. but they are .
Keep in mind that 40 to 50% of all foreclosures come from failed landlords in the C and D class space
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
Originally posted by @Scott M.:
@Idris Haroon Oh my, I knew the second I saw this title there would be posts saying drop him, WTF does he know lol. No offense all but what crazy advice here. Idris posted 4 sentences. 81 Words. Not one of those sentences providing an ounce of detail into his holdings or personal situation. His financial advisor (supposedly) has seen all of his finances. But yeah, don't listen to the guy who has seen the data lol.
In the last crash I saw folks who were over leveraged and under cashed lose a lot. I also saw people in that same position gain a lot. I can't comment (and nor can anyone here given the information you provided) on your individual situation but I think your concerns and those of your advisor are great things to be considering.
Also there was a typo in your last sentence it is never "if we experience another recession" is is WHEN. There is always the next one coming because that is part of the cycle we live in.
I think it is excellent strategy to be thinking about and planning for the upcoming cycles so good on you Idris!
You are right, that is always the response. Someone says my real estate agent did X and all the real estate agents say, fire them. Someone says my PM did X and everyone says fire them. We are all a bunch of back seat drivers and Monday morning quarterbacks.
It is hard to comment on his financial situation without knowing it. That being said, even if we had the numbers, we are all still just giving an opinion on what over leveraged is. Banks consider anything over 75-80% LTV as risky, but some would consider anything under 100% of value as not overleveraged. Some people look at payment versus NOI as the measure of risk. Even if we all agree on the criteria used, leverage is actually a risk spectrum.
Another detail we need to understand is how his financial advisor is compensated. Are they paid on real estate investments? This speaks to experience and motivation behind their comments. If they don't invest in real estate or get paid for his real estate investments, their advice lacks creditability.
Bottom line, if you want better answer, ask better questions. Maybe he can fill in more details and that will change the advice.
- Rental Property Investor · Member since 2021 · 5 posts · 1 vote5y
@Idris Haroon I'm getting into the airbnb space to get diversity and increased profits. You may want to consider selling some and going into commercial investing which is based on the apartment building income vs. Your dtr.
- Rental Property Investor · Member since 2021 · 5 posts · 1 vote5y
@Jon Kelly I love your point. It is refreshing to hear you say there will always be risk and the 'what-ifs' never go away. I felt that was only my gut feeling.
- Member since 2021 · 28 posts · 14 votes5y
@Idris Haroon there is alot to unravel here, im an FA ill give you some of my thoughts.
First thing is RE and the market are two seperate beasts. First look at your stock protfolio to see how diversified you are. ( cyclical vs counter cyclical stocks etc)
2. Look to see how much you could borrow against your portfolio in case RE takes a dump and you need to get some short term cash
3. Break down the numbers of your homes and cash flow to determine how bad it can really get and make adjustments to prepare as much as possible. You can't predict the future but you can prepare as much aa possible
Hope this helps!
- Rental Property Investor · Cincinnati, OH · Member since 2020 · 84 posts · 81 votes5y
@Idris Haroon
Start a spread sheet and what might happen if the market collapsed in a nightmare scenario.
If your property values tanked 30% and half your tennants stopped paying because it's the great depression 2.0, what's your play?
Which ones do you sell and take the loss, can you even sell or would you be underwater?
Do you have the cash reserves to survive a significant loss of income during a global pandemic?
Your only over leveraged if you have no well thought out contingency plan.
A good rule of thumb is that you should be able to survive 6 months if you lost all tennants income and your job while still paying the loans and maintenance. This necessitates expanding slower than most people would like but it helps to prevent your investments from collapsing.
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