HELP!!! My financial advisor said I'm over leveraged

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HELP!!! My financial advisor said I'm over leveraged

Idris Haroon
Investor · Dallas, TX · Member since 2021 · 24 posts · 28 votes

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

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Dan M.
Real Estate Investor · Unadilla NY · Member since 2017 · 418 posts · 297 votes
5y

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.

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  • David Murphy
    Dublin, County Dublin · Member since 2021 · 28 posts · 15 votes
    5y

    What is your cash flow situation like?

    Do your properties cashflow positive or negative and what are your margins on them?

    Are your properties buy and hold?

    Are your properties to be held long term or are you speculating in growing markets?

    Does most of your income come from short term rentals?

    If this is the case then you could take a harder hit from a recession. If this is the case you may want to reconsider your real estate investment strategy or just balance it out with more long term tenant properties.

    How are you raising capital for your properties?

    Are you partnering with people with capital and splitting the profits or are you purely raising capital from bank loans and hard money lenders?

    0Reply
  • Todd Rasmussen
    Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Idris Haroon

    I think all the talking points have been hit. I made this calculator just to know how long you can sustain with what kind of cash burn. https://www.biggerpockets.com/...

    3Reply
  • Stephen Stokes
    Rental Property Investor · Austin, TX · Member since 2016 · 317 posts · 257 votes
    5y

    @Idris Haroon firstly I suggest you think about motivation a s how you are painting this Financial Advisor? Are they incentivized to get your money out of real estate and under their fee structure?

    I highly recommend anyone who has a financial advisor to only pay them on a “Fee-only” structure.

    https://www.investopedia.com/articles/investing/102014/feeonly-financial-advisers-what-you-need-know.asp

    1Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    5y

    The type of debt and specific LTV of each asset is what matters.

    Commercial, variable, hard money, private or seller-financed debt is different than 30 yr GSE debt. 

    if someone said they owe $3M in mortgages most would say they were over-leveraged.  Until there is a but secured by $7M in stabilized, performing assets.  

    it's all relative and biased advice from an advisor that doesn't earn fees on your RE holdings. 

    1Reply
  • Bonnie LowPro Member
    Lender · Asheville, NC · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    I have heard so many people in the real estate and financial independence fields recount stories about financial advisors giving really poor advice that I tend to shrug off things like this as coming from someone who is outside their area of expertise. That's just my opinion, but I'd encourage you to dig deeper into his recommendation if you're really concerned. Remember, he's getting zero management or brokerage fees from your real estate investment, whereas he would probably make a fee of some sort if you sold off some off that real estate and invested it in his managed products. So there's that. Secondly, is he saying he's concerned that you're not diversified enough - i.e. too much real estate compared to other investment strategies? (again, this is highly subjective) Or is he saying each property is too highly leveraged (i.e. very little equity in each home making the property value more volatile subject to market fluctuations). If you have more than one property, chances are you have at least 20% equity in each since conventional loans require 20% thereabouts for common down payment on second, third, fourth properties etc. If so, you have a built in minimum 20% hedge against market volatility if the market goes down. How knowledgeable is he about real estate and, specifically, housing valuation in the specific markets in which you hold your properties? Is he aware of what kind of operating expenses and cushion you have set aside for each of your leveraged properties to cover things like vacancies? If you have a healthy cash stash for each property, you can weather down turns and unexpected events more easily regardless of how leveraged you are. Finally (and this is just my opinion), your properties have tangible worth and provide a hedge against inflation, which is far more than can be said for over valued stocks run amok in an economy where government policy is to print money, thus forcing devaluation of the dollar. While I believe in diversity, real estate (to me) is still the safest investment vehicle. You can also look to achieve diversity within asset classes of real estate. And leverage can be a beautiful thing with interest rates as low as they are now. Like so many things, there's not one simple answer that works for all of us. Just some thoughts for you to consider if you want to have another conversation with your financial advisor.

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    1Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    5y

    Thoughts:

    1. Any leverage is overleverage if you can't afford to make the notes in absence of rent over some period of time. Some people use 6 months or 1 year. I like a longer time frame - years - but I'm near the end of my working career and so don't have as much time to make up losses with alternative income.

    2. It's difficult for anyone to give you any advice without access to the rest of your financial situation. He might be right or he might be crazy, or he might just be self-interested, or all at the same time.

    3. Inflation destroys the value of debt, so from a purely financial point of view a reasonable delta between income and debt load will only increase over time. As long as you can out-last your leverage (and that your leverage interest rate is fixed), using inflation to destroy the value of the debt is smart business. 

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  • Steve HodgdonPro Member
    Investor · Novato, CA · Member since 2015 · 432 posts · 321 votes
    5y

    In December 2006 I bought a small shopping center with 65% LTV and a $2.7 million dollar loan. I was not overleveraged. In March of 2008, the center was 80% economically vacant and only worth $2.5. All my equity evaporated. Could it happen again? End of story is I hung on for 8 years, feeding the property instead of getting income. Eventually the path of progress reached me and we exited up $1 million in 2016. Worked out to annualized 7% ROI.

    1Reply
  • William Jenkins
    Real Estate Broker · St. Louis, MO · Member since 2014 · 206 posts · 194 votes
    5y

    @Jay Hinrichs - Your comments couldn't be more on point.  I sometimes feel like I am taking crazy pills when I read all of these max leverage and refi until you die posts.  For the last 10 years its worked though, and that is the only market most BP posters have ever seen in their life.  You get a vague post like this, and EVERYONE says, "No your fine.... fire your advisor and buy more property.  While your at it, tap your home equity too... Its dead money." 

    I can't predict a recession or correction, but this is EXACTLY the mentality that leads to them.  These people will get flushed just like the ones in 2008 did.  Fifteen years from now when they are rebuilding their portfolio they will be on forums like this being the voice of reason like you.

    4Reply
  • Catie Lawrence
    Flipper/Rehabber · Arvada, CO · Member since 2019 · 63 posts · 47 votes
    5y

    @Idris Haroon agree with some of the advice about asking what his fees are!? Also, depending on age/knowledge around RE - he may just not get it/be super old school. Does he have you in mutual funds?

    Ok, all jokes aside, run your numbers - if you’re cash flowing/managing money properly/not over spending in your life & still able to invest....I think you’re good!

    0Reply
  • William Jenkins
    Real Estate Broker · St. Louis, MO · Member since 2014 · 206 posts · 194 votes
    5y

    @Steve Hodgdon - That is an EXTREMELY important lesson that many here could learn by simply reading your post 2-3 times and letting it sink in.

    The reality is though is that most will skip right over this, and the ones that don't just think "OK boomer."  No offense on age by the way, but that is the "its different this time" mentality.

    2Reply
  • Allen Wu
    Rental Property Investor · Member since 2021 · 335 posts · 193 votes
    5y

    @Eric James

    Good questions…. Since covid, I’m now accruing for 12 months reserve to be safe!

    1Reply
  • Bob ReinhardBusiness Member
    Lender · Patterson, NY · Member since 2017 · 488 posts · 186 votes
    5y

    @Idris Haroon

    Greetings.

    Well, it sorta works like this.

    Either you trust his advice with your $ or you don't.

    If you second guess him, either get another advisor or just do his job for him and save the fees. Just that simple.

    Much success.

    Bob

    [email protected]914-861-5501
    0Reply
  • Justin Thorpe
    Member since 2020 · 437 posts · 675 votes
    5y

    @Idris Haroon

    He may be wrong. but what if he is right. I take opinions from everyone. He has given you his. Test it, challenge it. But don’t ignore it.

    1Reply
  • Fred Cannon
    Rental Property Investor · St Augustine, FL · Member since 2019 · 264 posts · 279 votes
    5y

    @Idris Haroon. His job is to give you advice. You accept it or reject it. What is your risk tolerance level. The people on here telling you not to worry are not giving good advice on my opinion. In the last RE crash a lot of people lost their life savings and had to short sell or declare Bankruptcy. That is definitely a concern. I had to drop my rent from 900 a month to $400 a month to get new renters after I lost renters or evicted for no pay. People have short memories. I am a small investors and invest for income, my properties are mortgage free or at least 50% down payment. I get grief for that but I sleep well at night. In the last RE clash I picked up 3 homes for 25% of their original selling price. I paid cash. I am a saver and a cautious investor. I love RE and it loves me back. It's all about your goals and your game plan. Risk and rewards is what you need to evaluate.

    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Steve Hodgdon:

    In December 2006 I bought a small shopping center with 65% LTV and a $2.7 million dollar loan. I was not overleveraged. In March of 2008, the center was 80% economically vacant and only worth $2.5. All my equity evaporated. Could it happen again? End of story is I hung on for 8 years, feeding the property instead of getting income. Eventually the path of progress reached me and we exited up $1 million in 2016. Worked out to annualized 7% ROI.

    we can all tell stories of 07 to 2012 meltdowns and beat downs.. and most of us that invested and worked through those periods of times had those types of loss's. I know I did.. and I know many many many other investors that lost it all.

    So again for me not predicting it.. but over leverage and thinking that cash flow will always be there is a very dangerous thought process.

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  • Mike B.
    Rental Property Investor · Madison, WI · Member since 2020 · 91 posts · 71 votes
    5y

    @Joe Splitrock

    I couldn’t agree more, have had questionable experiences with them myself

    0Reply
  • Derrick Dill
    Investor · Hawaiian Gardens, CA · Member since 2015 · 308 posts · 386 votes
    5y

    If Real estate were to crash tomorrow 90% value, nothing different would happen with my rentals. They would still cash-flow. They are leveraged with mortgages, but are paid for by the renters. People still need a place to live in a recession

    0Reply
  • Lynnette E.
    Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
    5y
    Originally posted by @Derrick Dill:

    If Real estate were to crash tomorrow 90% value, nothing different would happen with my rentals. They would still cash-flow. They are leveraged with mortgages, but are paid for by the renters. People still need a place to live in a recession

     Problem is in that recession you rent that is now $1500 a month may be down to $600 a month.  That 3 bedroom house you rent to a family of 4, for which YOU pay for the showers and other water uses now has a family of 8, so your costs increased too.  So now your house does NOT cost flow, even if it is rented.

    Lower priced properties loose rent and renters.  The higher priced ones, not so much.

    0Reply
  • David Flores
    Rental Property Investor · Morgantown, WV · Member since 2016 · 235 posts · 135 votes
    5y

    @Idris Haroon

    Lets put it this way, if everything went belly up you wouldn’t be able to afford the property taxes on a large portfolio. Even if every property was paid off.

    Lets say you are a full time real estate investor (the majority of your income comes from real estate). If for whatever reason all of your rentals became vacant and the world stopped. Well, no **** your over leveraged! Thats like telling Apple if there was a major recession and no one bought phones anymore hey would be screwed!

    There is natural risk in business, its how you manage the risk that matters.

    1Reply
  • Mark S.
    Real Estate Investor · Saint Paul, MN · Member since 2017 · 543 posts · 474 votes
    5y

    @Scott M. This is the best advice in this post. Too many people in BP are quick to think that anything in RE is foolproof and anyone who says otherwise is incorrect, without having all the relevant details. IMO this is not necessarily the best place to get answers to a question like this. And before I get dinged for my response, I don’t claim to be an expert and some of these answers may be correct- but they may not be. The OP did not provide nearly enough info for anyone to give any kind of informed and well thought out response.

    1Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    5y

    There are good financial advisors out there who are sophisticated enough to understand real estate and its role as part of a diversified portfolio. If yours is one of those, then heed his advice. Stress test your leverage. Worst case, likely case and best case scenarios of occupancy, rent and cash flow. Also evaluate the stability of your W2 income. It is so easy to ignore risk in a boom (bubble?) like we have right now. Especially here in BP where the "Refi till you die" crowd is loud and ever present.Only you know your risk tolerance and total financial situation. At the very least use your advisors feed back to look more closely at the situation. He has some distance and perspective that you may not.

    1Reply
  • Sean Yang
    Investor · San Diego, CA · Member since 2016 · 69 posts · 18 votes
    5y

    @Derrick Dill If economy were really bad, why do you think renters would continue to pay rent? Government probably would have laws preventing you from eviction as well.. then what would you do?

    0Reply
  • Hadar OrkibiPro Member
    Rental Property Investor · USA / NZ · Member since 2016 · 1k+ posts · 812 votes
    5y

    @Idris Haroon.

    First, I would like to say SORRY, but I don't have the time to read all the comments above.

    But I would like to put in my 0.20 cents worth...

    1. your financial adviser, what experience in Real Estate does he/she have?

    2. Does he has a passive income RE portfolio?

    3. did you work out your break-even point in your portfolio?

    4. Did he explains to you what the break-even point is? (if not, move on!)

    5. What "Bag" is he concerned about? are your properties' cash flowing well? and have equity in them?

    Please answer the questions above so we can give you a genuine answer!  

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    5y

    Are you overleveraged with mortgages being too high or is he saying you have too much of your money in real estate instead of other markets?  Nobody knows the proper amount of diversification and if it really is needed.  Leveraging the properties too high is a different story.  

    0Reply
  • Derrick Dill
    Investor · Hawaiian Gardens, CA · Member since 2015 · 308 posts · 386 votes
    5y
    Originally posted by @Sean Yang:

    @Derrick Dill If economy were really bad, why do you think renters would continue to pay rent? Government probably would have laws preventing you from eviction as well.. then what would you do?

    I’m glad you mentioned this because that’s what I’m dealing with right this moment. One of my inherited tenants is not paying rent and there’s an eviction moratorium.. fast forward to today: I’ve been approved for the government rental assistance. They’re going to pay all missed rents and 3 months rent in the future. What would I do? The exact same thing I’m doing now.

    1Reply
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