Question from one of my members.
When it comes to leverage, how do you prevent “over-leveraging” or leveraging so much property that you cannot control? For example, you leverage and buy 5 properties with less money down (than just buying one or two with more money down), you own more property but less equity in each property. So how would you financially manage in the event of a market downturn? Wouldn’t you potentially be underwater on these houses? I’m still looking into leverage and understanding it better but that was the main concern I had with leverage. Yes, I know everyone uses it so there must be some workaround, but I can’t understand what that is. Also, at what point do you pay off all of that debt?
Leverage is a game of understanding that debt is to your advantage as long as you aren’t paying for it. Say you bought a property for 200k and it makes 3k a month gross. Every 100k you borrow at 6% interest annualized over 30 years is $500 a month. In essence this property we would be paying a mortgage payment of $1k a month. After property tax and insurance say we only walk away with 1k a month.
– 1k Mortgage Payment
– 1k Taxes and insurance
Now, if the property is worth 300k at day of purchase you have 100k of equity. Say the market tanks the next year and the property drops to 100k in value. How do you handle the loss in equity? You simply just keep buying more property! You see.. you only realize the lost if you actually sell it. If you don’t sell it you don’t lose it. Plus.. why in the world would you sell it? Your making 1k a month net.. Plus Personally i want the market to fall so i could buy more and more at 100k because that means you’ll be paying $500 for the mortgage of a 100k purchase and be netting 1.5k after expenses..
You see if the market drops rent actually also goes up! Plus Debt.. is only bad if you are personally trading hours for dollar. Otherwise.. If the debt is constantly paying for itself and you make a cut from more debt you get.. wouldn’t you want to go into massive debt? The answer is yes..
Want to learn the game of debt? Get my 101 on multifamily investing and the game of debt video << not yet available but coming soon 🙂
Hope this clear things up for you…