Am I using enough Leverage?

Question

Hey guys,

Like any other investor, I'm always looking for ways to grow. I will share with you a simplified scenario of what I'm doing below and I would absolutely love any feedback from you guys about if I'm using enough leverage, how can I leverage more, etc...

Property 1
Initial Investment/purchase price: 100k
Purchase ARV: 150k
Obtained Hard Money: 95k

Property 2
purchase price: 95k
Purchase ARV: 140k
Obtained Hard money: 90k

Property 3
purchase price: 90k
Purchase ARV: 130k
Obtained Hard Money: 85k

** This stream continues on for another 2-3 properties. I am basically taking out a HML on every property in order to help buy the next since my money is tied up in property 1. I wanted to see if you guys see any room for improvement in regards to leverage so I can grow faster (what we all want!). Thanks in advance!

Account Closed · Answer

how long until you have to pay these hard money loans off?

Vikram C. · Answer

Leverage maginifies the outcome of your investments.  If your investments are good, leverage will make them look stunning.  If your investments are poor, leverage will make you take a big loss.  The problem, of course, is that no investor goes into an investment expecting it to turn out poorly, so the losses will always be a surprise.

I like to have a big equity cushion in everything I do to make sure that the worst case outcome is still acceptable to me.

Vikram C. · Answer

I think you are already very highly levered.  You are getting hard money in excess of 90% of your cost, which is quite high.

I have actually not come across any hard money lender who lends that much - wouldn't mind a referral to your hard money lender!

J Scott · Answer

As Bryan implies, hard money can be a double edged sword...it can provide you leverage when you have no other options, but it can also cost you so much that you're actually generating less profit than you would with less leverage (or no leverage).

Without more info (length of loan, interest rate, how much cash you have available, etc), it's hard to say whether you are using too little, too much, or the right amount of leverage.

Account Closed · Answer

so these are all flips??  you won't ever have to refinance with a bank to hold and rent out??

Tony Nguyen · Answer

Vikram - you're right, nothing is riskless.

Bryan - yes, these are all flips. No holding here =) I personally wouldn't use a HML for a buy and hold by the way. The cost would be too high for me to cash flow properly.

Joel - The lender I'm using is actually a hard money lender with points and rates (2 points  at closing and 16% annually), but I think due to the relationship and past property performances, they are comfortable lending to us property after property. Essentially, we initial put out about 125k and they've lent us almost 300k already and that's only for 1 fund. In regards to our ARV, we're pretty conservative and have not seen any listing DOMs go past 30 days. You are right about being careful about burning the relationship with our lender and that is something I take care of personally. Thank you for your comment and thoughts.

J Scott · Answer

Joel,

If you want a good commercial portfolio lender in the area, let me know...I have a good one (that I use for residential, but they specialize in commercial)...

Joel Owens · Answer

This is a good thread.

I have been looking at hard money to but do not like the rates,points,and conditions.

I do have private investors like Tony said that are relationship lenders at private money rates instead of hard money.The problem with those it what they will want out of the deal I have yet to determine.

They will either want a profit split or a straight interest rate payout.What I don't want is someone micromanaging the flip and getting in the way.I have seen that before and it is a disaster.

If you have 3 loans going already I would sell the ones you have first before getting in to deep with more and burning the relationship with your lender.

I hope your ARV value is based off the bottom 50% of solds in your area and not the top.You do not want to chase the market down and be stuck in a MUST RENT situation.

Vikram C. · Answer

Tony, there's no doubt that you need less equity for a short-term flip than for a buy-and-hold.  You do not have quite the same risk of asset price declines with a flip.  My experience, though, is that there is really no riskless business and it is always good to have a healthy amount of equity in your business.

Tony Nguyen · Answer

Hi Vikram - Having a big equity cushion is a great idea. To me, that makes a ton of sense when you're buying a property you're holding for X amount of years. Do you still do the same when you're rehabbing a property you'll be out of in 3 months or less?

Am I using enough Leverage?

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