Debt to Income Ratio (How far to leverage?)

[Austin Hall]

Hi,

I am new to real estate investing - BUT, I just closed on my first deal! Very exciting! I am already looking forward to doing another deal, but am wondering how far is 'too far' to leverage? (i.e. how much debt is 'too much'? - even for good cash-flowing deals!). 

I expect the answer has to do with how much risk one is willing to take, but I am curious to hear experienced investor's "rules of thumb" or take on this question! Curious to hear about other's strategies? 

Thank you for the help in advance!!

- Austin

[Andrew Adam]

Hey Austin,   

Congrats on closing your first deal! Yes it is very exciting and fun to already by thinking about the next one. On the commercial side 5+ units bankers will often mention debt service coverage ratio (NOI/debt service) which may be in the 1.2-1.3 range last time I was looking at it. And then your overall DTI Debt to Income ratio can be calculated on you personally. I put all my assets in LLCs so I don't really own them personally and therefore the debt doesn't count against my personal income when calculating the DTI. Some bankers have still made me calculate the debt payments of my apartments since I am personally liable for the loan, but then they get to use some of the rental income to help calculate that.

As far as personal debt (House, Car, ect) I like to be in the 20-40% range for my comfort level not including business debt.

Similarly I also like to figure out what my Leverage to asset percentage is. As if I own property and have very little equity in them then my options are limited. If I have a decent amount of equity 20-30% then I have some wiggle room if things went bad, and it should cash flow. For me it is harder to have properties cash flow with little equity. And lastly, If I notice that I have too much, 35-50%+ equity in my properties then not only are they most likely cash flowing very well but I might be able to refinance and pull out some of that equity to put to work in an additional property.   Those are some of the things I look at in my portfolio.

Best of luck!