A Controversial Look at Debt, Risk, and My Quest to Make $100,000 Through Leverage

by | BiggerPockets.com

BiggerPockets is many things to many people.  For instance, for Josh Dorkin it is an obsession (if asked he would tell you that at times – an unhealthy one, but that comes with the role of a CEO); for Brandon Turner it is fertile ground upon which to experiment the witchcraft of inbound marketing (think Dumbledor only the beard is not long and white – not yet).  And for someone who likes to educate (someone like me), BP is a source of never-ending topics to write about…

I noticed lately that one of the subjects that move people is Debt, more specifically “How Much Debt is Too Much” – ooooo…leverage…ooooo.  The following is an excerpt of an e-mail I received in response to the article I wrote for the BiggerPockets blog a few weeks ago entitled How I Bought a 10-Plex with 1.5% Down – Case Study:

That was a really good article. You placed a bet on the water, on the increase in rent, and on decrease in taxes. That’s risky, but the odds were/are in your favor.  Hope it turns out even better than you expected.One question I have is about accumulated debt.  How much is too much? What if things crumble?  What if there’s mass exodus and none are left to rent your units?Not sure you have the answer, but still figured I’d throw it out there…

WOW – does this give me good material to write about or what?!  Let’s take this one thing at a time…

Disclaimer:          I do not deal in the single-family market.  I buy exclusively apartment buildings because they provide much more diversification of income and expandability opportunities, included in which are options for forcing appreciation.  Also, since the value-setting mechanism in the commercial space is Capitalization as opposed to CMA which is used in SFR space, apartment buildings represent a much more stable and controllable value.

I generally don’t like to speak in hypothetical terms, so let me begin by giving you a status report on that 10-Plex that I originally wrote about.

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Status Report on the 10 Plex

As of this writing, I’ve turned over 4 units out of 10.  Let’s look at the results:

Unit 1:   Before

  • Rent was $575/month.
  • Rent included water service, and since water runs about $15/month the true rent was $560/month.

Unit 1:   After

  • Rent went to $685/month.
  • Tenant pays me $20/month to keep the water service in my name, and since water runs $15/month, not only did I rid myself of the expense but I am making $5/month for the trouble.

Unit 1:   Net Positive

  • $130/month – that’s $130/month of NOI that flows directly to the Cash Flow.

Unit 2: Before

  • Rent was $575/month
  • Same as in Unit 1, the rent included water service, and since water runs about $15/month the true rent was $560/month.

Unit 2:   After

  • Rent went to $625/month.
  • Tenant pays me $20/month to keep the water service in my name

Unit 2:   Net Positive

  • $70/month

Unit 3: Before

  • Rent was $595/month
  • Rent also included water service, and since water runs about $15/month the true rent was $580/month.

Unit 3:   After

  • Rent went to $625/month.
  • Tenant pays me $20/month to keep the water service in my name.

Unit 3:   Net Positive

  • $50/month

Unit 4: Before

  • Rent was $595/month
  • Rent also included water service, and since water runs about $15/month the true rent was $580/month.

Unit 4:   After

  • Rent went to $675/month. (I replaced flooring)
  • Tenant pays me $20/month to keep the water service in my name.

Unit 4:   Net Positive

  • $100/month

Also, I did apply to lower the property taxes and succeeded.  Property taxes were lowered by about $1,425/year, which was slightly more than what I requested.  So, let’s tally these numbers up:

Gross Income Increase:                                                   $350

Operating Costs Savings (taxes):                                    $118

NOI Increase:                                                              $468

Cash Flow Increase:                                                  $468

Worth Mentioning…

As you can see, the smallest net rent increase including assignment of water expense has been $50/month.  Even if this bare minimum is all that I manage to achieve with the remaining 6 units, I will have surpassed my stated objective of $700/month of Expandability on this deal.  Quite likely, I will do better than that 🙂 .

What Does This Mean?

This increase in Gross Income, since it’s not accompanied by any increases in Operating Costs, will flow through directly to the NOI and Cash Flow.  Thus, having purchased a building with $1,000/month of Cash Flow ($100/door), I will be looking at $1,700+ of monthly CF ($170+/door)…I’ll take it!

Also, the additional Annual NOI of $8,400+ will justify an increase in value of $84,000 at 10% CAP, which happens to be the going rate for a building like this one in my town…I’ll take that too!  In fact, at the time of acquisition the NOI of the building stood at $3,406/moth, or $40,874 annually.  Having pushed that to $4,100/month, or $49,200 annually, I will have improved the valuation of the building to $492,000 at 10% CAP Rate.

I bought the thing for $373,500.  So, in another year and a half, I’ll be able to stick about $120,000 on my balance sheet, and $1,700+/month into my Income Statement…I WILL TAKE ALL OF THAT!!!

What About the “Risky Bets”

With all due respect – I fail to see the risk in the bets I placed.  I know my marketplace.  I know what things should rent for and I know what they should cost – don’t you?  I spotted an undermanaged asset and immediately knew that there was no legal, moral, or otherwise reason why the owner should continue to pay for the water service and why the apartments should continue to rent under market rent.

In principal there certainly is risk in trying to hike rents – all of the tenants could leave!  And some have…do you see me crying?  The essence of living life on our terms is positioning ourselves to only deal with those people whom we want to deal with.  Some have decided that my expectations for how this building should run are not to their taste – so?  It’s like I wrote in the article entitled Should You Tell the tenants you are the owner? – I am the owner – things will run a certain way – if you don’t like it, someone else would be happy to take your place…and they have.  Furthermore, I am not asking anyone to pay above that which is fare in my marketplace.  And the tenants have spoken…

Food for thought:               All of this is predicated on one simple fact – I know my marketplace, and I know the landlord/tenant law.  I know what things should rent for, and I know what the units have to look and feel like in order to deserve those rents.  I know what I am allowed to do, and what would be wrong to do.  Do you?

What is RISKY, is buying units without knowing EVERYTHING that there is to know about the marketplace and relying on a management company or a real estate agent to do it for you – NO! 

To mitigate risk you have to understand the demographics, the social trends, and the employment picture of a town, not just the numbers relative to the specific building.  It just kills me that people buy buildings half-way across the country having been there once – that’s stupid!

This particular 10-plex happens to be situated 10 minutes away from my house.  If it was 3 hours away, or in another state, I would not be buying it – it is not big enough to warrant me coming out every month…oh yeah – I will be THERE if I own a building either personally or as part of a conglomerate.  I will be there to study trends, to make contact with the political establishment, to introduce myself to tenants as THE OWNER, and to train managers…I WILL BE THERE!

It is my retirement!  If I wanted to outsource my retirement, I’d find a stock broker!

Am I Worried About the Debt?

There are a couple of different points to make here.  First of all, yes – of course I am worried, which is why I MANAGE THE ASSET MYSELF and I pick my deals very carefully to ensure strength from both the Cash Flow and Equity stand points.  Throughout the process that I just described, I am able to add to both substantially.

What this means is that if times turn very rough, I will bee able to come down on my rent very significantly and still break even long enough to hopefully ride out the storm.  Furthermore, having seasoned it for a bit, and having further improved the operations, I should have no trouble selling the building if need be at a very substantial discount to the capitalized value.

Look – it would be nice to own this thing free and clear yesterday.  Unfortunately for me, I wasn’t born with a silver spoon in my mouth and I have to leverage debt, and as long as I do, I have to protect myself with knowledge.  It’s not full-proof, but what is?

Final Point

I am of the opinion that if you must have debt, which is the case for most of us who did not inherit either money or business, that it is better to have $10 million than $100,000.  $100,000 of debt makes you a slave to the lender; $10 million makes you a partner.  If you loose the $10 million, the lender will also loose…

Now you tell me, would the lender be more willing to work with you over $100k or $10 mil?  I know this is a bit counterintuitive, but think about this…By the way, in case you are wondering, I’ve never been late on a mortgage payment in my life!

So – is what I am doing risky?

Leave your comments below!

Photo: Dan Simpson

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben the author of the Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.


  1. Ben, congratulations on finding an undervalued asset and improving the operation to increase that value.

    I have to take a minor exception to what you wrote. Technically, yes, you have “added $120,000” to your balance sheet (if you are using market value accounting. In a real sense, you have not realized that additional valuation until you actually sell this asset.

    The risks that I see that you did not discuss (turning more to the topic of leverage), is the financing costs of carrying the debt. Did you take out an adjustable rate note to fund this purchase? When (not if) interest rates increase, will your established cash flow cover the increase in your interest expense? If a significant number of tenants pull the trigger and buy homes before rates increase more, can you maintain the full mortgage payments? That is the problem with excessive leverage..

    Still, you don’t control interest rates and you have concentrated on the things that you can control as a good businessperson should.

    • Kevin – thanks for reading and thank you for a thoughtful comment!

      1. You are right – the $120,000 of equity is paper money. You are not right in that in order to liquefy I would need to sell the asset. There are many creative techniques to tap this equity.

      But, you will say. this is your margin for safety; you shouldn’t leverage that. Well – let’s look at that:

      Suppose Kevin, I was looking at another opportunity similar to this one – let’s say an apartment building with a purchase price of $500,000, expandability of $150,000, and current CF of $1,500 with possibilities to grow to $2,500/month. But, in order to buy this building, I would need 10% down.

      In this case, if I liened on my 10-plex in the amount of $50,000 to provide me with that down-payment, I’d be loosing equity on it but gaining $150,000 or potential equity on the new acquisition. Not to mention that in the process I’d be picking up $1500/month of CF at closing with growth possibilities of another $1,000.

      There is nothing magical about this. This is called bridging and it’s been around forever – you do have to be knowledgeable and prudent though. Having said this, my capacity to carry the debt is a function of CF, having nothing to do with equity. Equity needs to work – it needs to be traded in for CF.

      2. Of course I utilize ARM. I have many of those. It’s not true that I can not control the interest hikes. I negotiate caps on the interest. For example, 2 points per adjustment, and no more than 6 for the duration on a 20 year AM. This way I know my worst case scenario, which allows me too allocate a portion of the newly acquired CF to positively amortize notes… 🙂

      Here is the problem. When you are small, you can utilize salable Fannie/Freddie notes. When you are big, you can get 30 million dollar notes amortized of 35 years from FHA and others. But, being in the middle, which is where I am, requires taking on risk of ARMs and Balloons – there is no other way to finance large projects.

      I do not recommend this to newbies – not at all. A certain level of sophistication is required here. And Kevin, I would be happy to hear your thoughts on avoiding ARMs once we own more than 10 units – I don’t know of any.

      Life is not about avoiding risk, it is about managing it. So, I mind my business picking the cherries and managing them into optimal working condition. The rest is with the man upstairs…

      Well – that was long-winded. Sorry about that. Thanks so much for your comment!

      • > Equity needs to work – it needs to be traded in for CF.

        > Life is not about avoiding risk, it is about managing it.

        Two best points I read. People have had it beaten into them from the salesmen of Wall Street to avoid risk at all costs. This has driven people into mutual funds where they are promised so much protection from risk. How has that worked for the past ten years?

        Instead, seeking out undervalued assets that are not suitably managed and turning them into solidly performing assets is finding the proverbial hidden gem. Good stuff!

        • Greg – you are reading between the lines, and I thank you for it!

          As to your question relative to how well it has worked out for people to give their money to the broker with talents on loan from God, we should probably ask our colleague Kenny Estes – he’ll tell us 🙂

          Thank you so much Greg for taking the time to read and comment!

  2. This is exactly the kind of project I’m working on right now except allocating the water never occurred to me. What a GREAT idea. And some of the tenants will make other decisions which will give us the opportunity to upgrade.



  3. Ben, you’re my hero! Awesome job on the project so far and thanks for the article!

    If you lived in an area where the going CAP’s are 5%, would you find a way to invest out of state or move? 🙂 In my out of state investing I’ve had to do my part to build a team/connect with people that know their local market the way you know yours. I’ve thought of moving though!

    • 🙂 Thanks Mehran!

      A couple of thoughts:

      1. CAP rate is a measurement of market attitudes and expectations. YOU CAN BEAT THAT! You may have to be very creative and entrepreneurial, but just because your cohorts are paying a 5 CAP does not mean that you should…food for thought

      2. Investment strategy is a function market conditions. Thus, if the CAPs are low, the values must be high. So, Mehran – go flip some houses 🙂 Then take the money, move to a different local, and buy CF. That’s what I’d do

      In fact, in Podcast 14 I told the boys that I don’t flip. Why – because I am not at all interested in working that hard for 10k. Don’t get me wrong – I am not dissing 10k; it would certainly make a difference in my life. Still, juxtaposed to the amount of work it is not worth it in my market. However, if I could get 50k spreads I may very well be a flipper. Makes sense?

      All things being equal – move 🙂 Come to Lima OH, we’ll get along well. FYI I asked Brandon to move – he dropped me like a ton of bricks…my feelings are still hurt

      • Mehran Kamari on

        1. Interesting, will ponder on this some more. The thing is, the caps are driven so low because there’s so much competition from people willing to deploy capital around here for less return. It seems(well as of right now) that this give me much wiggle room to be creative enough to achieve returns that are considered the norm in other areas.

        2. I had a strong feeling you would suggest flipping in my area, based on what you mentioned on the podcast actually. And yes, it does make sense 🙂 The seed has been planted! I actually met some hard money lenders last night.

        Not ready to move just yet lol! What do you like about living there? Aside from the 10-caps 🙂

        • Of course the CAPs are driven by idiots who like to overpay – one is born every minute of every day. So what? Their realtors are telling them that a 5 CAP off the MLS is the best they can hope for – and they believe. And sure enough, on the MLS that probably is the best that you can find. When everybody zigs – you zag Mehran.

          Ready – a million dollar piece of advice that people pay me a lot of money for –
          Stop looking for property. Look for circumstances!

          I was born in Liningrad – 7 million people. I will not miss a big city a day in my life. Lima is small, just big enough for me at 40k. The 10 CAP is indicative of the cost of living…get it? It’s not how much you make, but how much you keep at the end of the day!

          You just gave me a great idea for a future post…You’ve got some talent – keep working at it. And give me a call some time; we’ll chat. The number is at the website 🙂
          The deals are in circumstances.

  4. Case studies like these are so interesting and helpful for potential investors. As an investor on a smaller scale, I understand that it takes money to make money. And I manage my properties myself so that I know everything is done correctly and fairly. However, there are a lot of wanna-be investors out there who create money pits for themselves because they’ve seen some reality tv shows and think they can do the same thing with little to no business or real estate experience. I think that’s when these projects become risky.

  5. I love the practical scenarios provided. Thank you so much.
    I’ve got to attend the local Real Estate Investors group and find out what the CAP rate is in our area. I don’t think it’s 10%. I completely agree about the expandability and your outlook on debt.
    My example is so small, it’s hardly worth mentioning, but for my two ground-level units, when it came time to replace the carpets, I installed VCTs instead. Now those units are “pet friendly” apartments that have increased my monthly cash flow a bit on top of a general rent increase.
    I noticed that one of your units got new kitchen cabinets or cabinet faces. I would love to outsource the handyman work, but the ones I’ve contacted in this area want $75 per hour and want two weeks lead time and want to pop in and out between other jobs.
    Keep up the good work. I’m paying attention.

    • Ha – that’s a paint job!!! A good one…

      The guy on the floor in one of the pictures, who shall remain nameless to protect the innocent, is my handyman. We’ve been together for years and I truly don’t envy myself if I ever have to replace him.

      No example is too small – period. We all started somewhere. Having said that, I said in Podcast 14 that it is not any more difficult or time-consuming to do a 500k deal than it is to do a 50k deal – I mean that. The biggest difference is in thinking bigger, which is not easy sometimes…

      Thank you for the encouragement Jeff. I will continue to do my best here. Please check out my blog as well – lots of articles there, and other stuff.

      Thanks so much for your comment!

    • Hey Jeff,

      I guess what I’ve been trying to say is – I also don’t have a choice! My health and my circumstance is such that I have to win! The thing is – I can’t win unless I PLAY. 1 duplex here and there won’t do it for my goals Jeff; you know this more than most.

      I spent my previous life on stage with a fiddle in my hands. Now days I am holding a proforma, but it’s still just a big stage, and I am still performing – I wouldn’t have it any other way…

      Still waiting for those adoption papers Jeff 🙂

  6. I wonder how many people thought just like this before the implosion of 2008…or the recession of 2000, or the recession of 1992. Leverage is dangerous, always has been. At some point, the leverage gravy train stops and someone is left holding the bag. Hopefully it isnt you.

    • Adam – thanks so much for your comment!

      A few thoughts: Leverage is not a problem. Misuse of Leverage is a big problem. Falsifying docs to qualify for a loan is a problem; buying SFR units that could never be supported by rent thinking values are going to go up forever is a problem; gambling is a problem – whether it is in RE market or the equity market…

      I don’t gamble, as you know. I don’t care if my assets appreciate. I want CF and lots of it, so that if stuff hits the fan I can ride it out.

      Leverage has been hyped up Adam. There is nothing that’s risk-free in Investing. But considering the alternatives of sticking the money into CD or gambling in the big casino, I’ll stick with leverage Adam; I’ll take my chances on allowing my 28 tenants (to date) pay down my leverage for me 🙂

      I appreciate your comment very much. It is important!

  7. Nice article Ben. I don’t invest in multi-family properties, but I know folks that do and some do very well. I love your take on having more debt:

    “I am of the opinion that if you must have debt, which is the case for most of us who did not inherit either money or business, that it is better to have $10 million than $100,000. $100,000 of debt makes you a slave to the lender; $10 million makes you a partner. If you loose the $10 million, the lender will also loose…”

    That is a great way to look at it, and I’m pretty sure you are spot on with that statement. The bank would be so much more motivated to help you figure out a solution to that $10 million dollar problem than to a 100K problem which is pretty much peanuts to most banks.


    • Thanks for reading Sharon!

      In my mind multi is the best bet as a long-term hold. I will likely entertain commercial in the future, but that’s much more susceptible to the micro economics and my area is not the best for this. As I grow and expand, I will consider.

      Debt lights up fiery conversation – which is why I love to write about it. There is a rational side to this and an emotional. We are not always able to separate the two, which makes things interesting… 🙂

      Thanks so much for commenting!

  8. David Morrow on

    Thank you so much for addressing this pervasive, complicated, and controversial topic! LIke Brandon once mentioned on the podcast, I too suffer from a coginitive dissonance on the topic of debt. In my personal life, I am a debt-hating Dave Ramsey fan to the core, but in my entrepreneurial endeavors, I want to be more of a Donald Trump (or maybe a Ben Leboyavich!) and leverage other people’s money to make me rich. Consequently, I enjoy the profit I yield on my borrowed dollars but constantly worry about how much leverage is too much leverage. Your thorough, in-depth treatise on this topic helps comfort me that I what I am doing is both wise and safe.

    “The essence of living life on our terms is positioning ourselves to only deal with those people whom we want to deal w”ith.”

    This is a profound statement that could be the topic of whole new (equally verbose) post. It’s a powerful statement about the balance each of us must strike between being “people people” and “business people”.

    Thanks for taking the time to share your thoughts and experiences, Ben!

    • Hey David – thanks so much!

      I too worry about debt. Debt is me signing a piece of paper called Promissory Note – a promise. I take that very seriously. Money comes and goes, but my good name is here to stay – period!

      But at the end of the day, Debt is a tool just like the violin – you got to know what you are doing or a 3 million dollar 200 year-old beautiful violin sounds like crap…you know what I mean?

      Thank you so much for talking the time!

  9. Matt DeVincenzo on

    Great post Ben. I’m all for responsible leverage, and until recently that was 20% down and solid market analysis so you still had an exit. I just recently “discovered” your posts and definitely agree with your method and use, 0 down isn’t really (as much) a risk when you are 0 down but still cash flowing and when you still have built in value or “expandability” like you do.

    You’re definitely helping me to start trying to figure out how I can apply these same concepts to my RE goals to truly leverage my investments the right way.

    • Thank you Matt – I am glad to help. RE can be the most brilliant opportunity for the little guy – curtsey of leverage… I have a bunch of educational videos and other stud at my website if you are interested.

      Thanks for you comment Matt!

  10. I know I’m late at responding to this article. I can respect your stand-up attitude and approach on this issue of debt and your concern for how you feel about taking it on. It makes sense: debt is not bad, but depending on how you use it, you can leverage it in order to eventually self finance a project without the need for a lender. Good luck on your future successes.

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