Thinking to expanding my rental portfolio

[Dan L.]

Currently me and my wife have 3 rental properties in Tampa which valued at about 175-220k each. Rather than our own home, we do not carry mortgage on any of the rentals.

We're thinking to maximize the leverage to buy more rental properties without using more cash reserve, and want to ask BP members' advice on building a bigger investment portfolio by borrowing, or should we just wait for the current inventories to appreciate instead?

[Dave Foster]

@Johnny Sumner, I get where you're coming from and expected this kind of blow back.  But notice that I didn't say start paying off just any loan but the loan on the primary.  @Dan L. is not a novice starting out and needing a kick start.  He's experienced and looking at ratcheting up to the next level over time.  My advice was to someone comfortable in their life path wanting to take advantage of current success to ensure future success while minimizing risk of loss.

I wish I was able to take 3% money and turn it into 10-15% ROIs with complete confidence and 100% success.  But I can't.  Sometimes I've done way better.  Sometimes way worse.  Funny thing though I've never been able to predict with too much pin point accuracy.  So I first protect my primary residence so it can never be taken from me.  Secondly I maximize my retirement accounts because those can't be taken from me.  Third I moderately leverage investment real estate so I am reasonably protected from a down turn (they do happen quite often).  

No matter the timing of the cycle or the macros, modestly leveraged real estate has surpassed  returns of Real estate as a whole by about 10% since 1985.

And the reason is not that leverage is bad.  It's that too much leverage = too much risk.  And that risk can cause panic or forced selling in market corrections.  Those with moderately leveraged portfolios adjust their rents as needed, and simply shrug their shoulders and vacation domestically for a couple of years before using some of their equity to buy the bargain basement assets of formerly highly leveraged investors.  

Separating debt and equity in a portfolio also allows you to more safely maximize leverage with fewer loan costs and placing that higher leveraged risk on fewer properties.  It's a simple blending of returns to minimize exposure and maximize returns. Again, maybe not for everyone.   But My counsel was not meant to absolutely maximize return. It was advice that would maximize safety and allow for aggressive growth not fueled by a sense of desperation.  That's why it's stodgy and boring and not for everyone.  Like @Ned Carey said acceptable risk is a very personal thing.  I see so many waving the "borrow till it hurts" flag that once in a while I like to offer a counter point.  

Just keeping a promise I made to the Almighty in 2007 when I said,  "Please Please Please get me out of this one deal and I promise I'll spread the gospel of low debt forever more" :)