IS THIS TOO MUCH DEBT?

Question

Hey investors,

I'm getting ready to act on my first deal (extremely excited), but the funding is worrying me a little bit. I am looking to put an offer on a duplex in a small town outside of Lake of the Ozarks, Mo. There is a very large window factory being built just down the road from the units, and I don't think I'd have any problems renting out the units. It doesn't need much renovating, and I have a background in painting and trim. The asking price is 135k.

I am 23 years old and currently own my house and have 72k left on my mortgage and have around 35k in equity. I don't have the cash to put down any kind of down payment, so I'm going to get a HELOC for the equity in my house for the down payment and take a mortgage for the remainder.

Any tips or advice to keep me from making mistakes taking on this much debt?

Thanks in advanced

-Mike

Account Closed · Answer

I need a lot more information to understand your ability to weather the storms. I am not an advocate for leveraging yourself into a position where your empire crashes down upon you like a stack of dominoes. When leveraging there is the possibility that you lose both your investment and personal properties all in one swift swoop.

So, I would need more numbers to understand what the rental income will be, how much extra cash you have in the bank, or are earning to pay the mortgage when it does not rent as fast as you thought, or you cannot get as much rent as you planned, or your tenant both fails to pay rent, thrashes the place to the tune of $10,000 and it takes you 9 months and costs you another $5,000 to get a judge to remove him from the property.

This is my philosophy and I've made millions and millions in real estate over the past 50+ years. I never re-financed  or took cash out of a property so I could purchase another property. I may be a fool and 100% wrong, but my philosophy has always been to reduce risk so that I move only forward and never backwards.

Throughout my life, I met many investors who I idolized because they were re-financing their properties and hogging up everything they could get into with their leveraged cash. Later, down the road, a high percent of those investors lost every property they had their hands on and this happened for many reasons e.g. changes in the market, mental inability to manage the properties, illness, etc..

My biggest question is; will you have the money to back yourself up if (when) you ideal plan is not as ideal as you thought it would be.

Your words 'extremely excited' scare me. Excitement makes me think of 'anxiety' and both excitement and anxiety makes investors blind. These make think that people can see only the positive things they want to see and they block out the risk factors. If you have to ask someone else questions about your investing decisions so you can re-assure yourself that you are making the right decisions then you are not ready to make any investment decisions. You will be ready to make decisions when you have done so much research, crunched so many numbers and look at so many properties YOU will have so much knowledge you will be positive you are making the correct decision you will be 'in the zone' where you are telling other experts what is the best and right thing to do.

James Neill · Answer

@Michael Fellers The Lake of the Ozarks is a great place to be and invest but it is a unique area from a real estate standpoint. The expanding window factory is already increasing rental demand in that area and there is unmet demand throughout the lake area. The numbers aren’t horrible but aren’t amazing at that price point. The selling prices have soared this summer.  You may find turnovers being higher than you expect so make sure you can survive if real and economic occupancy is lower than you expect. Make sure you have extra room in your monthly budget and consider a 3-6 month emergency fund that would cover both your personal and rental property expenses if money stops coming in.  If you live out of the area, I would recommend a local property manager. There are multiple here who do a good job but you have to factor that into your numbers. Good luck!

Theresa Harris · Answer

If you are making $2500 a month after tax and pay $630 towards your mortgage, you are currently in a great position.

For the $135K purchase price (you can always offer a bit lower), the $1300 a month is close to 1%.  From the sounds of it, rental demand will go up (and likely housing prices will).  I'd buy it.  Take out the longest term mortgage you can on the rental to keep payments low.

Michael Fellers · Answer

Jacob,

Thanks for the affirmation. Congratulations on becoming self employed, that is written in my 5 year goal as well. I’ve been studying the exponential growth of leveraging debt for a while now, and I’m very intrigued. It just worries me a little bit with the state our world economy is in at the moment.

Jacob Stewart · Answer

Mike,

I think it's a solid move as long as the numbers on the property your acquiring work. I'm newly self employed so I can't use the HELOC option yet, but as soon as I can I'm using my equity to buy more real estate! With percentage rates as low as they are now it's a fantastic time to lock in a solid rate. Remember inflation makes your debt worth less over time so you can leverage your way to success as long as the numbers work. Hope this helps!

Michael Fellers · Answer

Jack,

I appreciate the constructive criticism, and I’ll admit that inexperience is something that describes me well. As far as the numbers and other information; I have a degree in business and have read dozens of investing book. I know that doesn’t account for much but I am fairly confident in my ability to look at numbers from an unbiased perspective and make a good decision based on the info I have. I currently have a full time job as a sales rep and make 2,500$ month after tax and 401k. My mortgage payment for my primary residence is 580$ but I pay 630$ which equals out to one extra payment a year. I will be getting married soon and my soon-to-be wife is more than willing to invest with me, but I don’t want to tie her name in yet to avoid damaging her credit if things take a led to turn somewhere. The market value for renting a 1000 sq ft unit in this area isn’t about 650/month Which would total 1,300 if both rented out with out problem. The estimated mortgage payment would be just over 800 I figured if i escrow tax And everything. I have about 5k in savings and 3k in my checking.

As far as advice, is there anything you would specifically look out for or anything to make sure of before you put an offer in?

Thank you!

Juan Pardo · Answer

It sounds risky to me.

IS THIS TOO MUCH DEBT?

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