When are you too over levaged?

[Brandon Duff]

Ground work:

Purchases: 

2015 SFH1 purchased 3/2 118k rents for 1100

2016 SFH2 purchased 3/2 122 rents for 1100

2017 (10/28/2017) closed on first multifamily (4plex) for 268k 12k in repairs expected rent per unit is 800 but looks closer to 900.  2/1 

Used 40k from refinance from SFH1 to use towards part of the Down payment for the multi family. 

SFH1 debt is 129k worth 172k 

Mortgage is 700 now

Rents for 1100

SFH2 debt is 96k and worth 160-170

Mortgage is 638

Rents for 1100

MF1 debt is 201k with 300k

Mortgage 1500

Rents for 3200-3600

My question: 

I currently own my own training company it is just me. 

At what point do you start paying off debt or stop buying properties.. like how many mortgages do you feel is easy to handle feel you won't over leverage. 

[Austin Fruechting]

As @Justin Fox stated, the real risk is cash reserves. Cash reserve needs change with the number of units you have. Someone with 20 units should have a larger cash reserve than someone with 1. But the funny thing is someone with 200 units probably needs less reserves than someone with 20 units IMO. 

I attached a little doodle I just to illustrate this. Assuming every unit averages to the same long term cash flow. With 1 unit it's binary; you either have expenses or you don't. With 20 you can have a lot of issues all at once. With 200 the odds of it deviating from the average by a lot are very unlikely. When you have a ton of units, you reach some economies of scale as expenses are concerned and your monthly cash flow remains much more stable. It doesn't fluctuate as much off of the long term average. 

Think of every property as a dice you roll every month. 3.5 is the average roll possible... 1, 2, & 3 are varying amounts of lower than average cash flow. 4, 5, & 6 are higher than average cash flow.  (the difference is 1 can be VERY negative when capex, or unit turnover happens)

   -  With 1 property it's pretty explanatory. 

   -  With 20 rolls of the dice, every once in a while you may roll 1's & 2's on 17 of the die. This could send you extremely negative for a while. Other times you'll roll a lot of 5's & 6's and be much higher than average cash flow.... 

   -  With 200 rolls of the dice, you won't deviate too far from the 3.5 average.  

BTW: that was a quick doodle to illustrate a point. I'm sure it's not fully accurate, but the concept of standard deviation holds true.