Is over leveraging bad?

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.

3k Gross
– 1k Mortgage Payment
– 1k Taxes and insurance
1k Net

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…

Nick

5 thoughts on “Is over leveraging bad?

  1. When the market tanks your tenants could also lose their jobs. If their local economy is hit hard, the negative effects of this will more than likely propagate and end up effecting you. It happened to us in two different markets were in (Houston, TX and Huntsville, Al). It happened in Houston in 1985 because their market is heavily tied to the energy sector, no were not there back then. It is happening now in South Dekota which was experiencing a boom a few years ago.

  2. I also forgot to mention that as labor pool shrivels your rental rates will decrease because you will be competing with other landlords experiencing the same hardships. You will be forced to offer incentives to keep your units occupied. As more and more landlords become casualties of the downturn your cap rate go up, and the banks will start being less friendly. But if your pockets are deep you can ride out the storm.

    1. This is an easy problem to deal with.

      1. I always invest with total failure in mind. When you pay off your properties and the town you invest in fails you are in big trouble. This is why I don’t ever pay off my properties.

      2. when you buy enough properties in an area you convert over to what is called portfolio loans that are non recourse. Which means you don’t personally gaurantee them. This being so if things dont go well I just let it hit the fan and call it a day.

      3. This is why I invest and build portfolios in 3 different states

      You learn more about this at my multifamily event.

  3. Hey Nick, I own a fully paid rental property and would like to use to secure a recourse loan. The purpose is to use the funds to finance the next project.
    #1 Does that make sense?
    #2 What financial entities offer this product?
    #3 Are there minimum on such loans.
    Thanks. I met you at the Hasbrouck Heights meetup May 11, 2017. I was the tall black guy right in front. We talked for a bit and you gave me some good info on multi fam. rental units. Thanks again.

    1. #1. Does that make sense? Your loan would need to be pretty big to get a non recourse loan. Typically 1.5m and up is the minimum loan balance. If your loan is smaller then that you would need to buy a few more properties and then cluster them together through a blanket mortgage making the new loan balance over 1.5m. << watch the multifamily video as I talk about this there. #2. You have to go to the rolodex and look up a guy name jeff. He does portfolio and non-recourse mortgages. #3. typically 1.5m to 2m

Leave a Reply