Uneasy feeling: How do you know if you are overextended?

Question

How do you know if you are overextended?  I am new to real estate investing, and I have just purchased my second property.  I feel like I can cover my payments every month, however I feel uneasy about the added debt.  I dont know why if I have the positive cash flow and a backup account.  I guess it is just the feeling of taking on new and more loans.  Is this a normal feeling to adjust to?

Toby Munk · Answer

I guess you are not worrying about being overextended in assets. It seems to be human to look at the negatives more than the positives.

Positive cash flow with reserves sounds good. Just think of the assets you have to show for your debts. This is different from credit cards debt... very different.

Michael Rossi · Answer

You should also consider that you are at the greatest risk with rental properties when you only have a few.  A landlord that has 2 - 5 rentals, has a much higher possibility that all his rentals will go vacant simultaneously than a landlord with a larger portfolio.  So, as your portfolio grows, the safety increases even though your debt increases.

Again, it all comes down to the numbers.  If you have a significant REAL cash flow from each rental, you're in pretty good shape.

Mike

Account Closed · Answer

Great story. Thanks for sharing.

Adam Logan · Answer

Never forget, 
1.  Cashflow is king.  Oh boy I know that now!  I was used to making 30-70k checks every 3 months.  But when I lost my Co.  I got left with a 200,000 lifestyle and a 40k job at the MOST so really, as long as your lifestyle is below your means, youll be fine when you sell.  I lived check to check and SPENT my 200-250k PER YEAR!!!  I was broke by the time the next check came cuz of an expensive wife.

2.  Vacant land is like a two headed alligator that never shits.  It takes and takes and takes producing no income only expense on taxes and such until it sells.   Dad always said that, I find it funny.  Though my best profit came off 3 adjacent lots I grabbed for 20k and sold for 81,000 a month later with no rehab, nothing.  Just sat down and called every person who had vacant land in that area whos mailing address was out of state and got 4 out of the deal, those 3 and another for 8k that I flipped in 3-4 weeks to a builder for 29,000.  So I made 80,000 that year alone just screwing around with the land AROUND a property I was rehabbing in a rural area  of town.  Then I made 50k on the house!  haha that subdiv brought me 130k for one homes worth a rehab and a days worth of phone calls!

Michael J. · Answer

When I bought my first property I was much more nervous about it, my second property (first investment prop) I had no reservations at all and felt good about it.

As long as you have decent cash flow and something in the bank for reserves then you should be good. There is always going to be some level of risk in anything worth doing but I think it gets easier as you go along.

Another thing to consider, is your day job the kind that you could easily become employed with another company for comparable pay? If not then you may want to get more reserve money to help float you if it is ever needed, if you can easily get a comparable job then you still need the reserves but you can have more peace of mind that you are able to find another job if you get layed off or fired.

Connie Brzowski · Answer

When dh and I were married, we were taught to avoid debt like the plague-- no distinction was made between good and bad debt. When we started our business and our debt ratio increased, there was a tremendous amount of conflict between our old programing and our new financial plan :crying:

No idea if you might fall in the same catagory, but if so there is a remedy  :D Run your numbers again, keep a large enough reserve so you can sleep at night and *keep moving forward.*

Mike is right on-- as your inventory of positive cash-flow properties increases, your risk decreases. And the more you learn about investing and real estate, the more comfortable you'll be with your decisions.

On side note: Personally, I've found that my old programming has slowed us down at times-- tend to be a tad too conservative  :roll:  That's okay, just something to keep in mind  :mrgreen:

Frank Adams · Answer

One way to look at this is to put yourself in the following scenario:

You lose your "day job", so your "regular" income stream disappears. Then both of your tenants quit paying their rent.

How are your reserves going to look in;

One month?

Two months?

Three months?

Four months?

At what point do you (1) start delivering Domino's pizza, and (2) start losing lots of sleep?

all cash

Richard Warren · Answer

Good luck to you.  You will probably be just fine.

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Michael Rossi · Answer

I consider debts on income producing assets to be good debt, as opposed to debt on non-incoming producing assets such as cars, boats, toys, etc.  However, I am concerned about your statement that "I feel like I can cover my payments every month."   Feeling has absolutely nothing to do with cash flow.  Either the numbers are right or they are not.  If you have done your homework and truly have positive cash flow, you should be making more money as you add more properties.  In that case, you should be sleeping like a baby knowing that the debt is making you money.  If you don't have real positive cash flow, that's going to be a real problem and is something to truly worry about.

Mike

Richard Warren · Answer

If you are in a positive cash flow situation and have sufficient reserves then you’re fine from a financial perspective.  However, from a mental perspective you have a problem.  Perhaps you just need to adjust to your situation.  There is nothing wrong with having the debt that you described unless it is causing you too much anxiety.  Everyone has a different risk tolerance and not everyone is cut out for this business, you have to figure out if you are.

One time a stock market investor was speaking to the billionaire JP Morgan and asking for advice.  He said he was having trouble sleeping because he was concerned about his stock market portfolio.  When he asked JP Morgan what he should do Morgan’s reply was that “he should sell to the sleeping point”.

You need to evaluate where you are and figure out if this is a feeling that you can overcome.

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