I need advice on my portfolio.

Investor · Petersburg, IL · Member since 2015 · 28 posts · 3 votes

I'm fairly new to this forum. I poked around on here a few years ago. I currently have over 20 units. I'm a school teacher also. I have been doing this for about 15+ years. Does anyone have advice on who to talk to to look over my numbers/portfolio? I've basically self taught myself everything. I've kept above water for 15 years so I'm not failing. However, it is always a sort of uncomfortable thing to share what I am doing as far as finances with people. Basically my properties are mostly all short term notes now. 5, 10, and some 15 year notes. They are all balloons. They do cash flow. However, I feel broke at the end of each month. Lol. I have a huge amount of equity in my properties. THey are all in top notch shape and I have amazing tenants. However, I constantly stress about the amount of debt I have compared to my income. I'd love for someone to be able to look over my stuff or advice on how to do that. I'm thinking of taking things to the next level and using some of my equity to acquire more units. However, my amount of debt keeps me second guessing. Any advice is appreciated..

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Gabe N.

Investor · Anchorage, AK · Member since 2015 · 29 posts · 24 votes

@Thomas S. I see you always beating on the drum of "refi and reinvest" when it may not be be best option for somebody that has enough properties already and just wants to simplify their current investments. In my view paying down or completely paying off a few of the better performing properties in this portfolio may be the least stressful option and would increase cashflow.

Another thing I'm curious about is this "ghost cashflow" or "artificial cashflow" as you put it. Cashflow is cashflow no matter how you get it. Whether that is 10 properties making 10% or 1 property making 100%. It's just money in the bank account at the end of the month.

I don't mean to single you out but I just see this approach being foisted on every person and I would like some clarification as to why it's the best for every situation.

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Brent Davis
OP
Investor · Petersburg, IL · Member since 2015 · 28 posts · 3 votes
8y
I have thrown out some lines to a few different people. We will see what they say. Hopefully I can get something done to move away from these balloons. Unfortunately the majority of my properties are balloons. My banker basically told me that was the only option.
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
8y
Gabe
Dead equity reduces overall cash flow/returns for a investor across his portfolio. It is buying cash flow at a very high premium. That premium is the opportunity value of cash.
Cash flow purchased with dead equity is phantom cash flow since it is created not by the property you are investing in but rather your own cash, cash that has a opportunity value far above that return. Maximum return possible is the prevailing mortgage interest rate that is being saved by paying down a mortgage. If you have a mortgage at 4% and you pay it down your cash is then earning you 4% return.
I would like to see a show of hands from all those investors excited about earning a 4% return. That is what cash buyers can expect as a maximum return on their cash today. Any additional return is generated by the property itself and remains the same regardless of how much cash is injected in the form of dead equity.
Inexperienced or conservative investors do not grasp the concept that every property has two distinctly different income streams. One is the property the other is your equity. They are separate entities and must be recognised as such to fully understand the value of money/cash. To not do so is to not understand real estate investing.
If you do not wish to reinvest your dead equity in more properties pull it out and invest in a income fund or REIT, practically any other investment vehicle will return better earnings than todays mortgage rates. You still have the cash as a security blanket but it is actually earning it's keep rather than buying crumbs.
I understand conservative investors, what I do not understand is why they invest in real estate since they have no concept of the true value of their cash. They are intentionally buying minimum returns.
With a cash opportunity value of 10%, and mortgage rates at 4%, pay down investors are losing 6% on every dollar of dead equity annually.
Equity is where conservative investors money goes to die.
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Brent Davis
OP
Investor · Petersburg, IL · Member since 2015 · 28 posts · 3 votes
8y
Well stated Thomas. I think you make great points.
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Gabe N.
Investor · Anchorage, AK · Member since 2015 · 29 posts · 24 votes
8y
@Thomas S. Thank you for taking the time to answer some of my questions directly.
Not to derail this discussion too much but I have to say I agree in large part to your approach but I would have to say it is more situational that what I think you promote. For where I am at in my investing career (admittedly at the very beginning) the maximum leverage approach is excellent and produces the maximum results over time. However, for somebody that has a good portfolio and wants to simplify I would argue that refinancing and reinvesting is not necessarily the ideal approach given the stresses that it can incur.
Again, this is coming from a place of ignorance since I am fairly new to investing but I think the beauty of real estate is that you can make it as complicated or simple as you like and tailor your investment to your vision for your lifestyle so perhaps the one approach fits all mentality is what I am against.
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Jay Helms
Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes
8y
Morning @Brent Davis - congrats on all your REI success! Have you had this conversation with your CPA and if so, what did he/she say?
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Brent Davis
OP
Investor · Petersburg, IL · Member since 2015 · 28 posts · 3 votes
8y
Update: So I took the advice here and I am getting all of my properties refinanced on 30 year fixed. It has been quite a process. I'm pulling all equity that I can out of the properties to use to purchase more properties. I'm a bit stressed on the cost of this refi. (I don't have a firm number yet but it sounds like between 15-20k.)I'm also going against my grain and pushing all these notes to 30 year. I hope I am making the right decision here. My cash flow will improve a lot. However, I feel like a weight is on my by extending the loans out!
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Allan Rosso
Investor · . · Member since 2017 · 173 posts · 84 votes
8y
@Brent Davis just because you put them on 30 year notes, doesn't mean you have to take 30 years to pay them. You can always pay more towards the principal when times are good and you can afford it (obviously taking a cut from your cash flow). If certain months get tough (repairs come up, tenant turnover, etc), you know you have the flexibility of being held to a smaller payment, than you would on a shorter note.
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Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
8y
@Thomas S. Just to echo @Gabe N. point, the world is a grayer than you always paint your corner of it. Just as an example, 4% is actually an excellent return if you are allocating it to some kind of savings vehicle.
Banks treat you differently with better debt ratios. Refi and cross collateralization are easier. An experienced in-a-particular-area landlord like yourself receives more latitude on DSR likely; you have earned it.
Good DSR can cushion a job/income change, new purchases and on and on. Strategic use of debt is vital, an automatic assumption that more is better in every circumstance is unwise, especially for those whose real estate investments coexist with other income, professional circumstances, retirement issues etc.
We are in an unprecedented period of liquidity over the last 30-40 years. Debt may not be as favorable compared to asset prices forever. Hedging risk can be a very smart play. It only looks dumb when things are going well or in a highly stable environment.
And I don't think your opportunity cost calculations factor in risk spread appropriately. You always list 10% as the benchmark return, not the return minus volatility, risk etc. An index + a spread would be a better comparison and cash doesn't come off quite so badly in many scenarios.
But thats neither here nor there, just wanted to get some nuance of my chest and in there for @Brent Davis . Brent, my-worth-what-you-pay-for-it tactical advice would likely be similar to Thomas S. actually : stress test the various loans under different interest rate scenarios since we have a rising rate environment. Refi sooner rather than later into one or more loans with as long an amortization as possible and ideally 5, 7 or 10 resets instead of a balloon. Maybe pay less attention to a particular quarter point or whatever rate and a good deal of attention to the timing. In any case, stagger the balloons and the resets as much as possible so everything comes up at different times and I think you will sleep better. Would love to hear about your journey.
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Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
8y
Hey Brent, apologies for missing your last post, got distracted! 30 year notes and increased cash flow is a great thing, especially compared to balloons. I jumped the gun on your situation and figured those weren't an option since you seemed in commercial. I long for fixed 30 year notes!!!
Would be curious about equity cash allocation on the notes and as Allen (and, Thomas!) said you have a lot more options with what to do with your cash...go chase 10%!!
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
8y
@Brent Davis The key to success with 30 year notes and max leverage is insuring you have the savings, cash flow and adequate number of doors to survive a down turn in the markets. The reason investors lose when markets turn is not because they are over leveraged it is because they do not protect themselves, income wise, when it happens. With a large enough portfolio, tenants paying your debt and still having plenty of cash flow a down turn is a hit but not a loss.
Millionaires/billionaires sleep well at night knowing they are well protected. This does not mean having hoards of dead equity sitting doing nothing. Investing is about financial preparedness not hoarding of cash earning next to nothing in returns. Why invest in real estate with cash earning 4% when a REIT can easily double or triple your return.
The reason this works for every investor is due to the math. The reason this does not work for every investor is because they don't understand the math. When the math is understood and applied correctly leverage is simply another word for profit. Done right risk is higher but not significantly.
You can invest smart to earn an income or you can buy your income with cash. Cash hoarders are not investing they are either buying income or parking dead cash. They place a very low value on what they have. Which is fine but flies in the face of the goal of many/most investors.
What they fail to understand is that 30 years of high leveraged income will far out perform paid off property equity. Wait 30 years to cash out or reinvest and double, triple, quadrupole your equity. It's a choice driven by your investing mentality.
Appreciation is a perfect example of why you want to own 10 leveraged properties rather than one fully paid off property.......... 10 X the profit. Risk...yes. But that is the name of the game isn't it ??????
Low risk you earn 300K, higher risk you earn 3M. Lose 300K or lose 3M the result is the same in either case. Some believe high leverage leads to total loss. not the case when done right, definatly when done wrong. If you don't know how to do it then don't do it. If you do not understand or are not comfortable with managed risk then leverage is not for you. Then again real estate investing is not for everyone either.
Hoarder, investor....... It's a personal choice.
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Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
8y
Originally posted by @Brent Davis:
Update: So I took the advice here and I am getting all of my properties refinanced on 30 year fixed. It has been quite a process. I'm pulling all equity that I can out of the properties to use to purchase more properties. I'm a bit stressed on the cost of this refi. (I don't have a firm number yet but it sounds like between 15-20k.)I'm also going against my grain and pushing all these notes to 30 year. I hope I am making the right decision here. My cash flow will improve a lot. However, I feel like a weight is on my by extending the loans out!
"I'm pulling all equity that I can out of the properties to use to purchase more properties". Tick!
"I'm a bit stressed on the cost of this refi. (I don't have a firm number yet but it sounds like between 15-20k.)". Say what now?
By your own admission, you "have a huge amount of equity in my (20+) properties" - but, $20k might be the best they'll let you have, "to purchase more properties"? What's up with that?...
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Brent Davis
OP
Investor · Petersburg, IL · Member since 2015 · 28 posts · 3 votes
8y
Sorry for the confusion. They are talking like the cost of the refinance will be that much. I'm able to pull over 200 grand.
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Gabe N.
Investor · Anchorage, AK · Member since 2015 · 29 posts · 24 votes
8y
@Thomas S. You are not wrong but I think you are taking things a bit to far. While I agree with your points, your delivery could use some work. I wouldn't necessarilyt characterize people that don't agree with you as "not investors" or "money hoarders". There are far worse things in life than having a bunch of money or equity in a property. Simply having equity that you are not pulling out does not disqualify a person from being an investor, in fact many people have paid of properties that cash flow more than enough money to support their lifestyle and then some and there is absolutely no need to expand beyond that size of portfolio. So the question is when is enough enough? Not everybody needs a thousand units and 10M a year in income so the need to leverage everything as hard as possible to reinvest is simply not there and would not make sense.
Again, I'm not saying your wrong, I'm just saying maybe lay off the absolute statements and derogatory remarks towards those that don't agree with your approach. I do agree with your approach (for the stage of investing I'm in) and I very much appreciate your advise especially in the Landlording forum where I've learned quite a bit so please don't take this as a slight towards your knowledge or what you've said on this forum.
5 Reply
Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
8y
@Thomas S. banging the same drum louder does nothing to increase the quality of your argument it just makes more noise.
Leverage is one tool, a powerful one as you have said, and perhaps the most powerful for most of us. "Done right risk is higher but not significantly"--lots of room for thinking in the phrase "done right" ?
Someone blindly following your "advice" as gospel to expand would think that maximum attainable leverage all the time and in every property was the only path to building a portfolio. Lots and lots of reasons why thats not true in every sector in every moment in every cycle and in every type of real estate and you can find plenty of evidence on this board and elsewhere to show it.
And moving from the tiny to the big: in addition to my own investing I've had the good fortune (?) to work directly with a few of the billionaires you describe and they use debt and cash and assets in a much, much more nuanced way than you have ever described, in their real estate investments and other investments as well.
One last thing: your posts are read by many here eager to learn. What is your intent towards them? Phrases like "hoarders" "don't understand math" and the like seem more designed to insult and to put down than help.

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Jason D.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
8y
@Jonathan R McLaughlin I think the foundation of @Thomas S.'s point is that if you are looking for maximum return, you accomplish that with maximum leverage. If you have equity, your extra cash flow is simply your own equity coming back into your bank account, and not truly new cash flow. Now, what I think you are getting at, and I agree, is that this approach isn't right for everyone, and some people aren't looking for maximum return in exchange for the stress of being leveraged.
0 Reply
Alex P.
Investor · Longview, WA · Member since 2015 · 94 posts · 176 votes
8y
For what it's worth, I always look forward to reading @Thomas S. advice.
1 Reply
Ned J.Pro Member
Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
8y
So all those guys that leveraged everything to the hilt and then lost it all in 2008, just don't know what they are doing?
Yes if you have tons of reserves to cover yourself when the sh*t hits the fan, then sure....you can ride the storm when your are leveraged up the a$$ and it all tanks....but most people that are leveraged that high do it because they don't have the reserves sitting around.......they cant weather the storm for 2-5 years until they can break even again.....
It surprised me how many people are back on the gravy train of leveraging the hell out of everything because it will never go south again....dangerous road. Deja vu from 2005-2007..........
Yes, you need to leverage your equity to keep moving forward....wont argue that....but to pull out ALL your equity to go buy more properties in a very high market, sounds like a huge gamble to me..... use the leverage....hell yes.....but using ALL of your equity is a huge ALL IN bet..... you better be able to back it up if there is a big correction......
Guess I'm just a wimp.....hope you are right.......
1 Reply
Caleb Heimsoth
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
8y
Thomas S. The people I know that have invested in real estate and paid it off early are millionaires. I don’t think they care about lost returns. They make plenty of money in lots of other ways. You’re not taking into account risk, which was already mentioned earlier. There’s also other reasons to have paid off properties. Let’s say I want to do commercial property. It’ll be easier to do that if I have one or two free and clear properties. I just commented about this the other day, about an investor I met recently who lost it all when they leveraged their equity for flips and then the flips didn’t sell and then they had 50 percent vacancy. Lost it all in under 2 years. I get your points, and I get the math trust me, but it’s not simply black and white. It’s more gray.
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Rachel H.
San Antonio, TX · Member since 2009 · 3k+ posts · 1k+ votes
8y
@Brent Davis Before you have anyone or any professional look at your portfolio, be sure you have all the numbers out on a spreadsheet. Analyze it first yourself. Then you can talk to someone, if need be. If you can see the numbers and where the money is going in and out, then you'll be better prepared to help yourself. Good luck!
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Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
8y
@Jason D. you put it well and I don't dispute the general validity of that central point for a given property. And if you have sufficient cash flow, reserves etc. by definition you aren't over-leveraged for most circumstances. But as @Caleb Heimsoth pointed out having equity in properties can be "leveraged" in other ways than debt. I mentioned a few as well but there are more and I'm sure many more than I know. Just saying its a bigger world than presenting a hard and fast rule implies.
1 Reply
Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
8y
Originally posted by @Brent Davis:
Sorry for the confusion. They are talking like the cost of the refinance will be that much. I'm able to pull over 200 grand.
Aah, sorry I misunderstood. My theory is that closing costs for a loan should not be any more than for property closings (ie. no more than 6%). In this case, that should mean: $12k, or less.
Good luck with your negotiations, and all the best for investing that $200k! Cheers...
0 Reply
Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
8y
Originally posted by @Jonathan R McLaughlin:
@Jason D. you put it well and I don't dispute the general validity of that central point for a given property. And if you have sufficient cash flow, reserves etc. by definition you aren't over-leveraged for most circumstances. But as @Caleb Heimsoth pointed out having equity in properties can be "leveraged" in other ways than debt. I mentioned a few as well but there are more and I'm sure many more than I know. Just saying its a bigger world than presenting a hard and fast rule implies.
Jonathan and Caleb, the phrase: "equity in properties can be "leveraged" in other ways than debt" doesn't gel with me. I see that Caleb mentioned that Commercial Lenders will likely be more ready to lend if you do have one or more properties free and clear, but, does that mean that they won't require those same properties to be put up as security (ie. leverage = debt)?
Because, if those same Commercial Lenders can't come after those free and clear properties when their owner's loan with them is in default - how silly would they look then?
[My point is: If Commercial lending only secures the asset loaned against, why bother waiting until you have free and clear properties before applying? Saying "It’ll be easier to do" could be construed as insulting to the Lender].
Or, what did you actually mean? Cheers...
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Caleb Heimsoth
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
8y
@Brent Coombs I don't think you'd necessarily have to put those free and clear properties up as collateral. I simply meant some commercial lenders have net worth requirements and DTI ratios and having free and clear properties would help with this. If I want a 900k commercial loan but I have almost no net worth, that's probably pretty unlikely is all I was saying. You can leverage yourself to the hilt if you want. I'm simply saying that isn't for me.
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Tanya F.
Rental Property Investor · Madison, WI · Member since 2013 · 629 posts · 339 votes
8y
I've got 3 loans on rental properties, recently refinanced to 15 or 20 year fixed. I don't like paying so much interest to banks, and I don't intend to buy a lot more properties. Maybe one more.
I'm happiest when they'll all be paid off- I'll be close to 70 then- maybe I'll pay them off early. It gives me a nice conservative return, I'll get between 6.5% - 9% cash on cash once the loans are paid off- but it will be actually more than that, that estimate is using today's rents and they will certainly increase in the next decade. Current total cash on cash is between 5.5% and 8%. The current loan to value for all is about 41%, and rental equity is between 500-550K, and we've got about the same total RE equity as you if we include our personal residence.

Yeah, I'm conservative, and I'm making plenty. I would feel uncomfortable with more leverage. I wouldn't have refinanced to 30 year loans, but then I'm older than you are, and we are already living off of our rental cash flow - in fact my entire W2 income goes pretax into retirement accounts (403b and 457b). Are you maxing those between you and your wife? Now that you've refinanced can you live off of your cash flow?
1 Reply
Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
8y
@Caleb Heimsoth, hmmm. Commercial Lenders beware! [ie. Last time it was "No document" loans that got the world into trouble. Next time, it could be your "Non-recourse" loans!]...
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