How much debt is too much debt?

[James Quinn]

So I've been getting into real estate investing recently and i just finished the bigger pockets ultimate beginners guide and learned a lot. But one thing that was not mentioned, and i cant find a lot of people talking about it, is debt in your properties. Lets say you have 20 properties all worth $100,000 and you only put $10,000 down on each property. While these properties could be cash flowing $200-$400 each, a month, you only have about $200,000 in equity over all of your properties, and $1,800,000 in debt. This seems like a lot and seems very dangerous. Could a newbie get some advice? Thanks :)

[Brian Ellwood]

That's a good question. It would depend on the type of loans you are getting in that hypothetical scenario. What is the term on them, shorter or longer? With longer being safer of course. 

Also there's a metric called debt service coverage ratio. Basically, what's your cashflow to debt service ratio? 

If you had 10K in rents coming in each month and 5K in mortgage payments, the ratio would be a 2. But, debt service isn't the only expense, you also have prop mgmt, tax, insurance, vacancies, and repairs.

If your debt service accounts for around 40% or less of your gross income, then you should be good no matter how big you scale.

I.E. 1K/month in rent, 400/month in mortgage payment. 

What you may need to do is try to reframe the way you view debt like this. 1.8M in debt is definitely a large number. But, you OWN 2M worth of assets (assets that historically appreciate at 5% per year, which would be 100K/year!) and you have 200K in equity, and 6K/month in net positive cashflow.

I'd hope that, if I offered to gift you 20 houses with those terms attached, you'd jump on the opportunity to take it ;)