Author Topic: Amount of leverage  (Read 8469 times)

mooreprop

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Amount of leverage
« on: July 03, 2014, 05:26:50 PM »
I know that the amount of leverage varies with personal risk tolerance, but I was wondering what is typical for an experienced real estate investor.  Would anyone like to share the percentage that their loans comprise of their net worth in real estate?  I have kept my loans to about 50% of my values and am not sure if that is being too conservative, especially with the low interest rates right now.  (I was raised with a Dave Ramsey type dad who thought any loan was one too many, so I have come a long way!) 

clarkfan1979

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Re: Amount of leverage
« Reply #1 on: July 03, 2014, 08:28:59 PM »
With current interest rates, I wouldn't put more than 20% down, in my humble opinion.

GrayGhost

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Re: Amount of leverage
« Reply #2 on: July 03, 2014, 09:22:27 PM »
Here's a little background about me: my parents are immigrants, and are very risk averse. They've bought all of their cars with cash and although they did get a loan for their current home, they paid it off within 3-4 years or so. Personally, I tend towards being conservative with risk management and safety related things.

With that said, I think leveraging real estate investments is great, if you know what you're doing. It's a great way to boost your rate of return and avoid putting all of your eggs into one basket. On the other hand, the risk is amplified as well. So it's just a matter of doing your due diligence and thinking long and hard before shaking hands on a deal.

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Re: Amount of leverage
« Reply #3 on: July 04, 2014, 03:18:58 PM »
In general, Multi family is 25% minimum down via typical mortgage options.

We've put down that minimum on all three of our rental props (purchased 2012-2014). Interest rates on 2 of these are <4% however our latest investment was 4.625%, still a great deal. All are 30 year. One of our rentals was a screaming deal and has appreciated over 100k in a year. We knew we were getting a great deal at the time, but now it means we have possibly too much cash locked up in it and we might want to "harvest" some of that via HELOC to get the next property. We are in the buying phase, with a goal of 2 more rentals to complete our business plan of covering 100% of our living and discretionary spending. Phase two of our plan is to look at medical/LT care costs and see what it would take to cover those and to what extent we need these covered versus self coverage.

We are currently leveraged as follows:
own 29% of our primary residence, I am good with that, Dave Ramsey would have fits! - this has a heloc used to purchase rental #3
own 36% of rental #1
own 46% of rental #2 with $60k available to pull out up to 80% - havent investigated if banks will go to 80% of investment properties for HELOCs
own 31% of rental #3

Our DTI is quite low as we have one high income wage earner that makes each purchase a breeze.

There are two options for purchase of rental #4, either pay down the HELOC fast, or take out HELOC from #2 and combine with savings. We also could stop purchasing multi unit rentals and flip 2x SFHs to build more cash.

We currently have a 2 year emergency fund + 30k cap savings. No hair on fire debt emergencies aside from medical issues to worry about.

So, I feel we are currently running a little on the safe side and I would like to pursue digging into #2 HELOC options, even if to fund 2 flips in before rental #4. The landscape another year from now could really change as far as mortgage rates go. If we have a stock market correction all sorts of changes will take place...

We are stock market adverse as a rule, but I do have a pretty large 401k that would be affected by a correction as I am 90% stocks.

I am curious to see what others are leveraged at and what they feel is a comfortable leverage rate to be at.

I am of the mindset that once we switch gears to the "draw" phase, I would prefer to pay off the HELOCS ASAP, even if we convert them to fixed rates, they will be the first debt to focus on. the 30 year mortgages will not likely be paid down early.
 

greaper007

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Re: Amount of leverage
« Reply #4 on: July 04, 2014, 03:30:16 PM »
With current interest rates, I wouldn't put more than 20% down, in my humble opinion.

I didn't think it was possible to get a loan on an investment property with 20% down.    Are you refinancing a loan for a house that was previously your primary dwelling?

arebelspy

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Re: Amount of leverage
« Reply #5 on: July 04, 2014, 05:00:09 PM »
With current interest rates, I wouldn't put more than 20% down, in my humble opinion.

I didn't think it was possible to get a loan on an investment property with 20% down.    Are you refinancing a loan for a house that was previously your primary dwelling?

You can.  You don't get as good of a rate as if you put 25% down.
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arebelspy

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Re: Amount of leverage
« Reply #6 on: July 04, 2014, 05:07:09 PM »
I'm at about 33% LTV, so putting it as zenith did, we own 66% of our real estate portfolio.  I'd like to be more leveraged, but due to the amount of mortgages we have, most of the leverage available to me right now is commercial - slightly higher rate, and a shorter term (5 or 10 year balloon).  I'd love more 30-year fixed at a low rate (which I can qualify for with new purchases, but those terms aren't available for a cash out refi, so I'm sitting on a lot of equity, thus the lower LTV).

For me, I'm comfortable with a lot of leverage (for real estate - margin on stocks is another matter), as long as you're cash flow positive.  If you have a stable job on top of that with a high savings rate, you're good.

But it's gotta be good leverage - long term fixed, low rate.  I wouldn't get into a situation where you can lose something (short term with balloons, ARMs, cash flow negative, etc.).  It's just not worth it, when you can build it with a solid foundation.

Like I mentioned in another thread:
Quote
My current gross rents are just above $8,800 monthly, with monthly mortgage payments (P&I) of just under $1,500.

My FIRE goal is to have about $19,260 gross rents monthly, with monthly mortgage payments (P&I) of about $3,750, though that could change based on some cash out refinancing options I've been looking into (if it did change from what's stated here, it'd change to more in mortgage payments, but way more gross offsetting it).

(Emphasis added.)

IMO, it's a fairly small amount of leverage, overall. 

Actually I'm more conservative than I was, due to a comment rootofgood made 3+ years ago which changed my FIRE trajectory somewhat.
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jmoney

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Re: Amount of leverage
« Reply #7 on: July 04, 2014, 05:28:26 PM »
I'm pretty conservative also with the amount of debt. Most of my friends have a lot more than I do. I'm at about 42.6% LTV portfolio wide. I'm a little over my own personal limit as I want to stay between 30-40% LTV. And yes I do mean I am only 30-40% leveraged, the rest paid off.

My reasoning is partly low risk tolerance, desire to hire out everything and still make good money, and third the desire to get a high net worth with assets that could be borrowed against for larger projects the small 1-4 family rental properties.

Totally agree I'm way underleveraged. Another way I look at it is what is the most cashflow I can have for the least amount of responsibility - aka clogged toilets, roofs, furnaces, air conditioners, etc. As far as actual cashflow dollars go, think of how much more responsibility you have if you had 100 leveraged properties that cashflowed 100 per month versus 10 paid off properties that each cashflowed 1000 per month. Same cashflow, way less risk, management, etc. Ofcourse you get equity paydown, appreciation on your borrowed money, etc, etc with leverage, but that is all meaningless if your business isn't strong enough to make it through the four or five really bad cycles to pay off your 30 year loan.

One other personal requirement I have is that I must pay down 1% of my highest total debt each month. So without getting new loans I will have a paid off portfolio in 100 months. I put the additional required principal paydown into a HELOC so I can reborrow or use in deals like my last example to get even bigger gains.

Last, even in this credit crunch market you can buy at 100% LTV if you really must. You can do anything you can get a seller to do if they will take back a loan. If you can find a motivated enough seller you can even get no interest with nothing down if they agree. I can't stress enough how great getting sellers to take back a loan is. Usually a better interest rate than the banks and no ridiculous closing costs. Here is an example:

Just bought a two family house with $5 k down, 0% interest, $250 per month payment. Second floor is already rented and the is $50 positive cashflow from just that. Paid my attorney $200 to fill out a fill in the blanks note and mortgage. Seller was a tired landlord. Not bad, eh? Will Wells Fargo do that? Now to throw you finance guys a real curve ball, I'm actually considering paying him off early. Sellers unlike Wells Fargo also do one other thing I like, that is take payoff at a discount. At the closing he asked if I would reconsider the terms and give him a cash payoff of about 70 cents on the dollar. So tough choice - no interest or even cheaper house? I think I will keep the loan for a bit then ask him what he will take for a payoff. Can't lose either way.
« Last Edit: July 04, 2014, 05:42:44 PM by jmoney »

arebelspy

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Re: Amount of leverage
« Reply #8 on: July 04, 2014, 06:39:07 PM »
I think I will keep the loan for a bit then ask him what he will take for a payoff. Can't lose either way.

Keep in mind that he may sell the note, so you may want to take advantage of that sooner rather than later.  Pretty much anyone who holds a note gets solicitations in the mail to sell it (same as most owners of rentals, if it's a decent property, especially if they're out of state.)
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jmoney

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Re: Amount of leverage
« Reply #9 on: July 04, 2014, 07:42:53 PM »
I think I will keep the loan for a bit then ask him what he will take for a payoff. Can't lose either way.

Keep in mind that he may sell the note, so you may want to take advantage of that sooner rather than later.  Pretty much anyone who holds a note gets solicitations in the mail to sell it (same as most owners of rentals, if it's a decent property, especially if they're out of state.)

Good point about him selling the note. I have to keep it for a bit to accumulate the funds to pay him off without dipping into reserves though. I'm happy even with the full amount at 0%.

What do you mean by your FIRE goal? As in fire your boss?

Back to the original topic, curious if you guys know anyone who has been over 75% leveraged that has been in business over 10 years? Meaning they may it through the last downturn in 2008-2010ish? I personally don't know anyone who was leveraged over 50% that didn't make it. Not saying there aren't some who didn't.

If you're just starting out and have one house and a full time job you're probably going to be over 50% leveraged unless you're in a cheap market. That's fine in my opinion just work on paying the loan down and appreciation should help reduce your LTV over time. Things get more dicey if you have 20, 30, 40, 50 properties and you're 80% leveraged.

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Re: Amount of leverage
« Reply #10 on: July 04, 2014, 07:46:57 PM »
OK, Arebelspy, what comment did rootofgood make three plus years ago that changed your trajectory?

46 percent of my rentals are free and clear.

The leverage on the rental portfolio is a hair under 27 percent overall, including the free and clear properties. That's a little misleading because I moved the highest interest rate mortgage to the HELOC on my principal residence.  Unlike Fannie, Freddie never extended their HARP refi policy to holders of more than 10 mortgages, so they lost the loan.  I intend to pay that off during the lock period on the HELOC.  We'll see if I get distracted by some bright shiny object instead.

The highest LTV right now is 60 percent.  Most are in the high 30's or low 40's.  Only one was underwater at the bottom of the market.  Didn't really care, because I wasn't selling.  I had a great military tenant that paid on time and kept the house up.  He was reassigned to Las Vegas a couple of years ago and probably rents from Arebelspy now.

The net rental income pays all the mortgages, including the mortgage and HELOC (with principal) on my house and yields a nice income above that that varies a little with vacancy, collection loss, and the variable expenses.  I reserve for capital improvements and property taxes.

If I could have refinanced my highest rate mortgages, I would have.  Sadly, I'm over the 10 financed property limit, so the really low rates of 2012 and early 2013 were not available to me except for the HARP loans I was able to do. 

I get between 5 and 10 of those solicitations to sell every week from recent graduates of the guru classes.  And at least two or three a year from one guy that's been sending them since I bought the first rental 18 years ago.  He gets the award for persistence. 

arebelspy

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Re: Amount of leverage
« Reply #11 on: July 04, 2014, 07:47:40 PM »
What do you mean by your FIRE goal? As in fire your boss?

FIRE is a common acronym around here meaning Financially Independent, Retired Early.

Back to the original topic, curious if you guys know anyone who has been over 75% leveraged that has been in business over 10 years? Meaning they may it through the last downturn in 2008-2010ish? I personally don't know anyone who was leveraged over 50% that didn't make it. Not saying there aren't some who didn't.

There's a survivorship bias problem here.  If they were 75% leveraged in 2006 or 2007, they bought at the top of the market or cash out refid, were likely cash flow negative, and yeah, didn't do too well.

If they were 75% leveraged in 2011 or 2012, they probably saw the values of their properties shoot up and are now at < 50% LTV.  So anyone with that much leverage at the peak of course became massively underwater, anyone with that much leverage at the bottom gained massive equity (and is now likely has a way lower LTV).

If you're just starting out and have one house and a full time job you're probably going to be over 50% leveraged unless you're in a cheap market. That's fine in my opinion just work on paying the loan down and appreciation should help reduce your LTV over time. Things get more dicey if you have 20, 30, 40, 50 properties and you're 80% leveraged.

If you're starting out and have a stable, full time job and reserves, I'd leverage up and try and keep it as high as possible, not pay them down, but acquire more.  (Assuming, of course, they're cash flow positive, so they're helping you, not hurting, if you lost your job.)

When you think about FIREing, you can deleverage if desired.
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Re: Amount of leverage
« Reply #12 on: July 04, 2014, 08:16:45 PM »
The people that failed bought high, were cash flow negative from the beginning, had their vacancy increase in the recession and in a lot of cases lost their jobs.  They were largely novices and did not take a long term approach. 

I made a stupid (in retrospect) purchase in late 2006 after new build prices dropped 25 percent and builders were offering huge incentives.   Because I was conservative overall and because the property was always tenanted, I was never in any danger of losing anything.  I finally sold it last year and took a substantial loss, although nothing like the loss I would have realized if I had sold at the bottom.  You can recover from errors in judgement if you maintain a margin of safety.

jmoney

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Re: Amount of leverage
« Reply #13 on: July 04, 2014, 08:32:34 PM »

Back to the original topic, curious if you guys know anyone who has been over 75% leveraged that has been in business over 10 years? Meaning they may it through the last downturn in 2008-2010ish? I personally don't know anyone who was leveraged over 50% that didn't make it. Not saying there aren't some who didn't.

There's a survivorship bias problem here.  If they were 75% leveraged in 2006 or 2007, they bought at the top of the market or cash out refid, were likely cash flow negative, and yeah, didn't do too well.

If they were 75% leveraged in 2011 or 2012, they probably saw the values of their properties shoot up and are now at < 50% LTV.  So anyone with that much leverage at the peak of course became massively underwater, anyone with that much leverage at the bottom gained massive equity (and is now likely has a way lower LTV).


Sure there is a bias problem and that's why I keep such a low LTV. The market can crash at any time so a 80% LTV could become a 120% LTV. It doesn't matter if someone had a 30% ROI on a property if they lost it to foreclosure in 2008 because they are upside down. I would rather keep a lower LTV and ROI than be foreclosed on.

I'm always interested from a past history perspective in how many people with an LTV of under 50% were foreclosed on versus how many with an LTV of 50-75% and 75-100+%. Would be interesting to see how crazy my target LTVs of 30-40% are. Lets say it was 2007 again and 30-40% LTV became 60-70% LTV. What chance would I have to make it? I know I'm on the conservative side, by how far conservative am I really? Maybe I'm too paranoid but one of the things I try to do is talk to people who lost it all and find out why so I don't make their same mistakes.

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Re: Amount of leverage
« Reply #14 on: July 04, 2014, 08:41:53 PM »
Most people don't lose properties just because they are upside down. They lose them because the rental income does not cover the costs and they cannot make up the difference.  Usually that is accompanied by a steep loss in value.  When you are having trouble making payments, the house goes vacant, the tenant did several thousand dollars in damage, and the value has dropped by 60 percent, the incentive to fold is high.  OTOH, if you are collecting $1,500 rent on what was a $90k property with an $81k loan that drops in value to $40k, the incentive is a lot less.

arebelspy

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Re: Amount of leverage
« Reply #15 on: July 04, 2014, 08:47:48 PM »
Sure there is a bias problem and that's why I keep such a low LTV. The market can crash at any time so a 80% LTV could become a 120% LTV. It doesn't matter if someone had a 30% ROI on a property if they lost it to foreclosure in 2008 because they are upside down. I would rather keep a lower LTV and ROI than be foreclosed on.

No one ever lost a property to foreclosure due to a high LTV unless they chose to (I.e. stopped making payments.). A bank can't call a loan for being underwater.

If they had a 30% ROI, their LTV is irrelevant. I've owned underwater properties that cash flowed. How would I lose that to foreclosure?

I'm always interested from a past history perspective in how many people with an LTV of under 50% were foreclosed on versus how many with an LTV of 50-75% and 75-100+%. Would be interesting to see how crazy my target LTVs of 30-40% are. Lets say it was 2007 again and 30-40% LTV became 60-70% LTV. What chance would I have to make it? I know I'm on the conservative side, by how far conservative am I really? Maybe I'm too paranoid but one of the things I try to do is talk to people who lost it all and find out why so I don't make their same mistakes.

Yeah, that doesn't make sense. Cah flow matters towards losing a property. Leverage doesn't, beyond the correlation that higher leverage = less likely to cash flow.

Of course you could walk away if you're underwater, but that's your choice, and why would you if you're cash flow positive?

Your rents may decline a bit in that scenario, so hopefully you have a buffer, but your LTV isn't relevant in that scenario.

The bottom line is if you are cash flow negative, you're over leveraged and/or speculating/gambling. If you're cash flow positive, with a buffer, you probably aren't over leveraged, or you're at least okay.

It was the people who bought poorly who lost it all, not just those who were leveraged highly. They had bad, negative cash flow investments.
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jmoney

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Re: Amount of leverage
« Reply #16 on: July 04, 2014, 09:18:36 PM »
Most people don't lose properties just because they are upside down. They lose them because the rental income does not cover the costs and they cannot make up the difference.  Usually that is accompanied by a steep loss in value.  When you are having trouble making payments, the house goes vacant, the tenant did several thousand dollars in damage, and the value has dropped by 60 percent, the incentive to fold is high.  OTOH, if you are collecting $1,500 rent on what was a $90k property with an $81k loan that drops in value to $40k, the incentive is a lot less.

Agreed but indirectly the amount owed affects the cashflow because the more you owe the higher your payment regardless of the interest rate.

What I'm really looking to find out (and I think the original poster would be interested as well) is if we could survey all the people who were fat, dumb and happy in 2005-2006 and thought the market would go up forever and ask them their LTV and what happened to their portfolio and log the results. I don't care if they had 6 months reserves or the other rules of thumb, I want to know in practice not theory how many of them failed based on their LTV. There is some point (for sure a paid off portfolio) where you have to be so terrible at managing it to lose it to foreclosure, it's so unlikely if not nearly impossible no matter what happens to the market. I don't care about reserves in this case because I want to be more conservative and assume everyone was a terrible manager/owner.

Ofcourse it's impossible to interview everyone but just wondering what is the lowest LTV some of you know others had who lost it all in the downturn and why they lost it all? In my opinion, I never want to be foreclosed on and this is more important than what ROI I have.

FYI I fully realize there is a lot more to just LTV that decides if you lose it all. Property management, reserves and lots of other things come into play. But I try and talk with people who have lost it all and and see if it was their reserves, LTV, management, etc. that caused them to lose it all and make sure my personal minimums would have prevented their situation. If I can find person with the lowest LTV that lost it all, the person with the highest reserves that lost it all, etc. and beat what they had in my own business I feel pretty safe. I want the numbers from past history not theory so there has to be some overlap between things that aren't 100% related some generalizations have to be made.

I realize some people who were underwater were not foreclosed on but I want to categorize based on LTV to see what is a healthy LTV from the history of a market crash. I do the same with reserves and a few other key indicators.

arebelspy

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Re: Amount of leverage
« Reply #17 on: July 04, 2014, 10:49:12 PM »
Again, it is your cash flow that matters, not LTV.

You cannot lose a property due to being overleveraged, unless it is causing you to be cash flow negative.

You could have 200% LTV (i.e. have been 100% leveraged and have your properties drop in value by half), and as long as you were cash flowing at 100% LTV and your rents didn't drop much, you don't lose your properties.

Conversely you could have been at 50% LTV, and had your properties drop in half so you still weren't even underwater and you could have lost your properties if you were cash flow negative at that 50% LTV.

Make sure you cash flow, with a good buffer.

THAT is the key to not losing properties.  Not how much your LTV is.

(Obviously, as I said before: there's a "correlation that higher leverage = less likely to cash flow," but if you do cash flow, at whatever leverage you're at, and have a buffer for a drop, you're fine, regardless of LTV.)

You're focusing on the wrong metric to be prepared for a downturn.

LTV is only an indicator of health of your portfolio, it's not health itself.  It'd be like looking at someone's BMI to measure their health - an okay measurement at times, but not necessarily a perfect indicator of health, and not what I'd use as a primary measurement.
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clarkfan1979

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Re: Amount of leverage
« Reply #18 on: July 05, 2014, 06:10:46 AM »
I put 20% down on rental #1. I currently have 47% equity. I put 5% down on our current primary house. It currently has 44% equity. I think the plan is to buy another house in 1-2 years. By that time we should be around 50% equity on both houses and I feel comfortable doing that.

jmoney

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Re: Amount of leverage
« Reply #19 on: July 05, 2014, 06:24:42 AM »
Again, it is your cash flow that matters, not LTV.


I agree and disagree. With one move out call cashflow positive becomes negative on that property. Enough can make the portfolio not cashflow. I agree cashflow is probably the most important at first glance, but my argument is why ignore these other factors like LTV, reserves, etc. so you have a healthy business? Put another way using your analogy, if the doc says keep a BMI of 10%, heart rate of 60 beats a minute, and get 30 minutes of exercise a day why not do them all?

In my business system I have hard limits for net cashflow based on gross cashflow, LTV, reserves, and occupancy to determine if I can/should buy a new property. I think they are all equally important for a healthy business that can survive the long haul so I watch them all to make sure I have a strong business.


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Re: Amount of leverage
« Reply #20 on: July 05, 2014, 08:55:38 AM »
Again, it is your cash flow that matters, not LTV.


I agree and disagree. With one move out call cashflow positive becomes negative on that property. Enough can make the portfolio not cashflow.

That'll kill you even with a lower LTV.  How would be 50% LTV instead of 75% help you that much?

The key in that circumstance is to have enough cash flow so the other properties cover it easily, and enough of a buffer in your cash flow/rents that you can drop therent to just below market and get it rented right away and still cash flow.

If you're cash flow negative in that circumstance and have to drop your rent, you're still more likely to lose your property.

LTV is great to keep low for a number of reasons (preferably some properties free and clear, some massively leveraged so it averages to a medium amount, rather than all of them at a medium amount of leverage), but losing the properties to foreclosure is pretty low on that list.  Cash flow is the mos relevant number for that, by far.
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mooreprop

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Re: Amount of leverage
« Reply #21 on: July 07, 2014, 02:59:31 PM »
Actually I'm more conservative than I was, due to a comment rootofgood made 3+ years ago which changed my FIRE trajectory somewhat.

O.K., I am curious.  What comment was made by rootofgood and how did that change your trajectory?

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Re: Amount of leverage
« Reply #22 on: July 07, 2014, 04:56:03 PM »
I will have to dig it up, so I don't misquote him, but it was about his comfort level with leveraged properties versus FIRE.  I've been meaning to post about it since AR asked earlier, but I haven't dug it up yet.  Soon!  :)
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The Resilent Dame

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Re: Amount of leverage
« Reply #23 on: July 14, 2014, 09:09:10 PM »

You cannot lose a property due to being overleveraged, unless it is causing you to be cash flow negative.

You could have 200% LTV (i.e. have been 100% leveraged and have your properties drop in value by half), and as long as you were cash flowing at 100% LTV and your rents didn't drop much, you don't lose your properties.


Disagree strongly on commercial property. Personal experience.

Wells Fargo foreclosed on us for essentially having too high LTV on our commercial properties. Technically, the small commercial property was a balloon note that came due, so I guess that "payment" was missed. LTV on that was 83%. We refi'd back in '08 to buy out a business partner; otherwise we would have had lots of equity. We kept paying the normal payments, thinking it would be crazy if they foreclosed.

What Wells Fargo did was foreclose on our biggest commercial property, which is a 1m property. All because we "defaulted" on the smaller property. Positive LTV, too. All cash flow positive.

After 1.5 years and $60,000 in legal fees, (Wells Fargo makes you pay THEIR legal fees), we refinanced with a small bank.

Another Reader

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Re: Amount of leverage
« Reply #24 on: July 14, 2014, 09:43:14 PM »
And that's why you never, ever cross-collateralize.  Loan covenants are a bitch, and banks are very good at foreclosing in this situation.

The Resilent Dame

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Re: Amount of leverage
« Reply #25 on: July 15, 2014, 03:08:44 PM »
And that's why you never, ever cross-collateralize.  Loan covenants are a bitch, and banks are very good at foreclosing in this situation.

Yep. Learned this lesson the hard way. The bitch is that of course the new small bank has their fingers in everything we own. At least it is 123 Main Street Bank rather than Wells Fargo. The good news is that the huge loan (which was SBA, which is why it HAD to be cross-collateralized) was transferred rather than re-fi'd. We saved the fees (other than the $&$&#*$ attorney fees), AND our amoritization schedule is starting to work more in our favor, with much more going to principal each month. In 5 years if we hunker down, eat beans & rice, and keep our noses clean we will be in a very favorable position. Of course, we will be speaking to the bank as soon as we are in a position of power to do so and un-cross the loans.

You should have seen the paperwork to make this deal work.

mooreprop

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Re: Amount of leverage
« Reply #26 on: July 15, 2014, 07:47:01 PM »

You cannot lose a property due to being overleveraged, unless it is causing you to be cash flow negative.

You could have 200% LTV (i.e. have been 100% leveraged and have your properties drop in value by half), and as long as you were cash flowing at 100% LTV and your rents didn't drop much, you don't lose your properties.


Disagree strongly on commercial property. Personal experience.

Wells Fargo foreclosed on us for essentially having too high LTV on our commercial properties. Technically, the small commercial property was a balloon note that came due, so I guess that "payment" was missed. LTV on that was 83%. We refi'd back in '08 to buy out a business partner; otherwise we would have had lots of equity. We kept paying the normal payments, thinking it would be crazy if they foreclosed.

What Wells Fargo did was foreclose on our biggest commercial property, which is a 1m property. All because we "defaulted" on the smaller property. Positive LTV, too. All cash flow positive.

After 1.5 years and $60,000 in legal fees, (Wells Fargo makes you pay THEIR legal fees), we refinanced with a small bank.


A word to the wise.  Always keep a banking relationship open with at least 2 small local banks.  If one starts to get less friendly or wants to call something due it is funny how quickly they change their tune when you explain that you were thinking of switching to the other bank for your loans.  We have a line of credit that we use to buy rental properties and fix them up before getting a regular mortgage.  No problem for 20 years until they decided it was too risky for them in 2012.  We said O.K., then we will need to use our other line of credit at bank #2 then, and while we are at it will probably get the mortgages there too since it is too much hassle to keep running from bank to bank.  They decided that maybe we could keep our line of credit after all!  We also have a commercial loan for an apartment complex that was at 8% interest.  They claimed this was the lowest rate available until we told them we were going to refinance with bank #2, then they all of a sudden were willing to modify the existing loan to 3.75% or 4.25% depending on the payoff length of time.  Don't let a bank ruin your life.

The Resilent Dame

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Re: Amount of leverage
« Reply #27 on: July 15, 2014, 08:10:48 PM »

Quote


A word to the wise.  Always keep a banking relationship open with at least 2 small local banks.  If one starts to get less friendly or wants to call something due it is funny how quickly they change their tune when you explain that you were thinking of switching to the other bank for your loans.  We have a line of credit that we use to buy rental properties and fix them up before getting a regular mortgage.  No problem for 20 years until they decided it was too risky for them in 2012.  We said O.K., then we will need to use our other line of credit at bank #2 then, and while we are at it will probably get the mortgages there too since it is too much hassle to keep running from bank to bank.  They decided that maybe we could keep our line of credit after all!  We also have a commercial loan for an apartment complex that was at 8% interest.  They claimed this was the lowest rate available until we told them we were going to refinance with bank #2, then they all of a sudden were willing to modify the existing loan to 3.75% or 4.25% depending on the payoff length of time.  Don't let a bank ruin your life.

Yes, we've always had 1-3 banks. We own multiple businesses, commercial and residential real estate. However, this was such a complicated deal that we had to find a savvy, very experienced banker willing to wade through everything. We had to try several banks, and luckily were introduced to this banker through my husband's golf league buddy (in our case having the golf hobby really paid off). The $hit hit the fan in late 2012. All banks were so risk averse. Our portfolio wasn't horrible by any means, but it was on the edge of acceptable, and many banks told us right out that because the foreclosure procedures were started, even though they'd normally be open, they thought there was "some reason" that Wells wanted to dump us. We got all the way to loan committee at several banks, but they wimped out except our last hail Mary bank. We were up against such deadlines that we actually had a judgement of foreclosure that this bank "paid."

 The specific person assigned to the loan in Minneapolis at Wells was pretty incompetent. My husband hates when stories keep changing, and when he presented saved evidence of her inconsistencies (emails) she suddenly got extremely defensive and pretty much decided our fate at Wells. The whole process was such a huge life lesson and eye opener.

Anyway, back to the original subject, we want to decrease our leverage to much lower levels. In commercial property, 80% isn't low enough when values tank. My goal is to be right around the 50% and dropping mark.

I still love real estate and have dreams of buying more residential rentals in a few years when our equity increases. However, I won't buy anything without more than 50-60% leverage now and building a substantial cash cushion.

SDREMNGR

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Re: Amount of leverage
« Reply #28 on: July 16, 2014, 08:20:05 AM »
I hate fees more than a low LTV so I'm keen on paying down 20-25% and get 15 year loans.  I know the math is in favor of 30 year loans but I think the higher hurdle of cash flowing with a 15 year loan keeps me more honest in looking for better deals.

I agree with aresbelpy that cash flow is the most important factor in holding on to properties, not LTV.  Defaulting on the loan example above doesn't count.  As long as you are cashflowing and current on the loan, you are still in the game.  The way to win in the real estate game is to buy more when the market is at the bottom of the cycle and sell or refinance at the top of the cycle, and repeat.  Keep cashflowing in mean time to stay in game and build up cash reserves for when the market is cheap again. 

usmarine1975

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Re: Amount of leverage
« Reply #29 on: July 16, 2014, 10:57:47 AM »
I am at 71% LTV and have been at it for 14 years adding properties as I can.  My thought as one that is so leveraged is that it really doesn't make a difference.  If I continue as I am right now when I get to 50% LTV I still have the same expenses compared to the income that I get.  Cash Flow is the king in this business.  That being said I like the idea of being at 50% or below.

Blindsquirrel

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Re: Amount of leverage
« Reply #30 on: July 20, 2014, 05:43:52 PM »
   Have been at it off and on for 15ish years but only serious for about 12 and even then pretty casual investor/flipper. We are at 21% LTV if you add our spendy palace (financed 15 yr at 2.75%) but we will increase that by 10% or so I think in the near future as ARS makes good sense. Sleep like a baby as the entire payments off the rental houses are $525 a month vs 11,000 gross before taxes/insurance. At one point our LTV was over 100% I would guess but as was said above, cash flow is king. Leverage can be great it can also make your life a mess if you use it wrong or are unlucky.

escolegrove

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Re: Amount of leverage
« Reply #31 on: July 21, 2014, 10:00:22 PM »
We personally leverage as much of our rentals and personal houses that we can. We are in our mid-20's and very young and can stomach high debt loads. My husband has a stable job. We are in our growth and acquisition time. We are trying to buying as many properties as possible while interest rates and property prices are low. When the market increases and no longer make sense we plan on reacessing how much debt we want to carry.

defenestrate

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Re: Amount of leverage
« Reply #32 on: July 22, 2014, 09:59:30 PM »
When thinking about leverage--I think the best way to conceptualize it is against your entire portfolio. Have a target of how leveraged you think you can be. I think 50% is ok if the leverage is toward real estate.

I agree that rates are so low, it is best to keep those rates, but not at the expense of overleverage--

usmarine1975

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Re: Amount of leverage
« Reply #33 on: July 23, 2014, 08:55:15 AM »
I wouldn't throw caution to the wind simply because rates and home prices are low.  I would love to pick up a few more great bargains in my area.  But we are as leveraged as I feel my wife and I both can handle mentally and financially.  With Rentals it only takes a couple dead beat tenants, or a few turnovers in one month to put you in the red.  Being over leveraged can make either of those (which can and will happen) a catastrophe.   Granted if you have other Asset's to cover that deficiency, you are not as leveraged as possible.

Dave Ramsey (start the hating) Does not like Debt because he lost everything because of it.  He leveraged to the hilt, bought millions worth of Real Estate on Credit and was doing great until either a law change or in his words the Bank's called his loans and he couldn't pay them.  He now believes Debt to be a bad thing and not something anyone needs.  In my opinion because he couldn't make it work for him.

We just had 4 turnovers.  All went rather quickly and have been re rented with little to no problem save 1 that took just under 5 months.  I call it my problem unit.  It is 1 of 3 in the building we own and for whatever reason it takes longer to rent.

It's a 2 bedroom but the 2nd room is half the size of the first and it's in a city location.  Roommates would argue over which room and ultimately go elsewhere.  We finally realized this and listed it as a 1 bedroom and will do so going forward.  It rented within a month of the new listing strategy.

Snowboard junkie

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Re: Amount of leverage
« Reply #34 on: July 23, 2014, 10:34:53 PM »
Credit unions and smaller banks will typically allow a lower ltv if you have a good relationship. Cross collateralizing can help you to negotiate better terms if your credit is not good but is really a bad deal overall due to the increased risk of a bad domino effect.  Short term it's great but long term is very helpful. 

At the risk of being contrarian, I would suggest that leverage be avoided for deals that only meet the bare minimum criteria (ie 1% rule). If you are leveraged 75% and a downturn like 2008 happens, you cannot take advantage of it because you have no available cash / credit.  If you are leveraged 50% now and that downturn hits, you will be at 75% ltv or worse quickly.  The only way around that is to be patient and keep some cash on hand & some unused credit. 

Personally I was at about 90% leverage personally and in terms of investments in 2008, which resulted directly from poor choices.  I was subsequently lucky, but I would not recommend that approach. 

My current leverage is 0, but if there is a good buying opportunity, it will likely go as high as 50%.  That's an arbitrary number that lets me sleep well.

monarda

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Re: Amount of leverage
« Reply #35 on: July 23, 2014, 10:50:54 PM »
I'm around 50% LTV total  (to be exact, 47% loan, 53% equity)
This 'exact' number is based on guesstimated values (ha)
(also adding mortgage rates, to combine with the mortgage rate roll call thread)

where we live: 61% LTV   2.75%  15yr
rental1             57%   2.75%  5/1 ARM interest only, then balloon, due in 2016. Hope to sell by then
rental2             36%   4%  15yr
rental3             43%   5%  30yr
rental 2 and 3 have the highest value (each are 2 family houses)

In the next couple of years we'll pay down the loan a bit on rental3 to make it more equivalent to a 4% 30yr loan.
Not sure exactly where that will leave us, but perhaps somewhere around 40% LTV
If we feel like we have too much equity sitting around, we'll buy another rental.
« Last Edit: July 23, 2014, 10:55:06 PM by monarda »

thestudent

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Re: Amount of leverage
« Reply #36 on: July 25, 2014, 08:49:22 AM »
To put my answer in perspective, keep the following in mind:  Short term interest rates have fallen on average since the early '80s.  Currently the s/t rate is 0, thus mortgage rates are extremely low.  So, if you can make your numbers work and you have a cash cushion to fall back on for repairs and vacancies, I'd say LEVER UP.

I have three properties that together average at the 1% number, each is producing an avg of ~$325/mo not including repairs, but including property management.  (I'm in a professional type position, and can't devote time to managing them yet)

The combined equity in them is around 22%. 

I can't stress enough though that the key is to have adequate cashflow and adequate backup funds for the repairs.  All three have needed ~5k of work at turnover or purchase to get them in excellent condition for the next tenant.   

mooreprop

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Re: Amount of leverage
« Reply #37 on: July 26, 2014, 06:16:57 AM »
Yeah, I am one of those crazy people who have been investing and managing for long enough to have seen 2 really bad real estate cycles.  I agree that it is crucial to have a big enough cushion to keep yourself out of trouble.  Interestingly, the biggest problem for a risk averse investor is the "up" part of the cycle.  You cannot find any deals that make sense and your tenant pool is small since all the good ones buy their own homes.  Interest rates often go up, so your payments are higher as well.  I have decided that the best gauge of when to sell is when your tenant pool dries up. 

The big difference in this cycle is the fed's interference with interest rates.  The last time they were this low was just after WWII.  Thus my question about how much leverage is common/desirable.   Is there anyone here who was investing just after WWII? (or know someone who was?)

Another Reader

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Re: Amount of leverage
« Reply #38 on: July 26, 2014, 10:52:31 AM »
I have decided that the best gauge of when to sell is when your tenant pool dries up. 


That's a pretty good indicator.

arebelspy

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Re: Amount of leverage
« Reply #39 on: August 05, 2014, 08:43:46 PM »

You cannot lose a property due to being overleveraged, unless it is causing you to be cash flow negative.

You could have 200% LTV (i.e. have been 100% leveraged and have your properties drop in value by half), and as long as you were cash flowing at 100% LTV and your rents didn't drop much, you don't lose your properties.


Disagree strongly on commercial property. Personal experience.

Wells Fargo foreclosed on us for essentially having too high LTV on our commercial properties. Technically, the small commercial property was a balloon note that came due, so I guess that "payment" was missed. LTV on that was 83%. We refi'd back in '08 to buy out a business partner; otherwise we would have had lots of equity. We kept paying the normal payments, thinking it would be crazy if they foreclosed.

What Wells Fargo did was foreclose on our biggest commercial property, which is a 1m property. All because we "defaulted" on the smaller property. Positive LTV, too. All cash flow positive.

After 1.5 years and $60,000 in legal fees, (Wells Fargo makes you pay THEIR legal fees), we refinanced with a small bank.

Yes, I was talking about for a fixed loan without a balloon.  Naturally you can lose a property if you can't pay the loan when it's due.  Sucks about your situation, glad you were able to deal with it.

And that's why you never, ever cross-collateralize.  Loan covenants are a bitch, and banks are very good at foreclosing in this situation.

This is great advice.  Unfortunately sometimes loan options aren't available without doing so.  Probably still not worth it though.

I agree with aresbelpy that cash flow is the most important factor in holding on to properties, not LTV.  Defaulting on the loan example above doesn't count.  As long as you are cashflowing and current on the loan, you are still in the game.  The way to win in the real estate game is to buy more when the market is at the bottom of the cycle and sell or refinance at the top of the cycle, and repeat.  Keep cashflowing in mean time to stay in game and build up cash reserves for when the market is cheap again. 

Absolutely agree.  Defaulting on your commercial loan with a balloon can lose you a property.  Being underwater on a conventional loan can't, so if you're cash flow positive, leverage isn't something to be afraid of.  It's not something to take lightly, but it's also not something to run from.

And I absolutely agree with those that said cash reserves are paramount.  Even if you're cash flow positive, at some point several negative things will happen at the same time.  If you aren't adequately prepared with reserves, you'll not be able to pay what's needed, even if you aren't overleveraged.

I have decided that the best gauge of when to sell is when your tenant pool dries up. 


That's a pretty good indicator.

That's good advice.  I'll have to remember that.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Blindsquirrel

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Re: Amount of leverage
« Reply #40 on: August 06, 2014, 08:12:11 PM »
 Yeah, that is a good point, our toughest years were 2005-2006 when they were selling houses to anyone who could fog a mirror. The worm sure turned on that one and rental yields are very good now.