Should i have anxiety with all my debt and business model?

Question

So we started a buy and hold rental business a little over 3 years ago and have 23 properties. Bank keeps lending us money and basically the debt is scaring me a bit and im like i have no business doing this and its going good but i have my days where i worry alot. So my debt is $895,000 but according to the banks and real estate agents and my knowledge there all worth $2,025,000. I just dont know if this is all correct and what if these numbers arent real?   The gross rent is about $23,000 and after all expenses make around $7,000 but keep spending everything and putting right back into business and are area is really appreciating. My plan is to hold as long as i can and once we slow down a bit  and stop the mortgages are payed off we will really cashflow alot more like right now would be $15,000 once lines and mortgages are payed down. Any thoughts on all this would be very helpful. Me and my wife are both 30 years old also and this has turned into my full time job and i enjoy it most of the time. Beats my old job big time. Any advice or thoughts would be great. Thanks BP

Jay Hinrichs · Answer

well I guess we all missed something..   I think I will go to Coscto now and blow 500 bucks..

Marc Winter · Answer

Your peace of mind is more important/valuable than dollars.  You should take a break, enjoy how far you've come, and go back to investing with a clear mind.  Don't be in a hurry or big rush--that can lead to more anxiety and possible hurried/poor decisions.

And CONGRATULATIONS on your successes!

Jim K. · Answer

@Joshua D.

OK, here we go again!

Have you stopped telling people that your wife is an entitled spoiled brat who is too stupid to have any say in how you spend the business's money on your brand-new tricked-out truck? You made The Money Show podcast with your dirty laundry the last time you aired it in the forums. Remember the private message you sent me last time after I pointed out that running down your wife wasn't a productive move? Let me see if I can find it...yes, here we go!

"Whats your deal man? Why are you concerned about what im doing or me? Also yea my wife for some odd reason came on here changing stuff up. But my question is whats it to you?"

So my advice would be to make sure that you're not still destroying your marriage while you're building your business.

Jay Hinrichs · Answer

the most likely is the key phrase here.. what happened in the GFC and I am no way predicting this happening to that magnitude again but it did happen and history can repeat it self.. many many landlords and apartment owners were in 5 year roll overs and their loans got called.

it happened to me.. all my LOCs save one about 12 million dollars worth got called between 08 and 09.. we spent the preceding years paying them off.. credit froze..

So if you do have balloons I would start with those.. retire them if you want to refi make sure you refi into a perm loan that is fully amortized.. but I think at your age and your income within 10 years you could be truly financially free IE no debt 25 doors paid for.. etc etc.

And again I am not a refi till you die person I don't believe in the mumbo jumbo of max debt leverage .. I believe in some debt of course we all have it.. but those that I know that are truly wealthy have little to no debt on their real estate.. that's what I call financial freedom.

Bryan Devitt · Answer

@Joshua D. Do you think that worst case scenario your properties will lose 60% ot their values on average? Do you have enough in reserves to cover a year of expenses on half of your properties at the same time? Your leverage isn't an issue at all, if you have reserves then you're good there too. $800k in debt isn't crap when you can sell them worst case for $1M+. If you're that worried I'll buy your portfolio for what you owe tomorrow so you can sleep better at night.  ;-)

Mike Dymski · Answer

50% LTV is reasonable

$23 income - $8 expenses = $15 NOI - $8 mortgages = $7 cash flow (if I understand correctly)

DSC (debt service coverage) = 1.875 times ($15 / $8) = pretty safe

Stress test these numbers for a down economy

Set aside some cash reserves

Sleep well at night

Jacob Sampson · Answer

Congrats.  You are doing well.  I am in a similar position.  I have about 1 mill in debt and 38 units.  I can't tell you if you should be worried or not but here are some decisions or thoughts I have made regarding my business.

1.  It is hard, to both, aggressively buy down debt and aggressively grow the business.  I have accepted that at this point I am in the growth phase.  This means that outside of having a reasonable emergency fund I am going to me spend all of my cash on acquisitions.  The key is to be opportunistic.  Don't loosen your standards just because you have cash to burn.

2.  I chose to have a reasonable number of my properties be SFH (18 of my 38).  I figure if times get tough I can unload SFHs easier than multi family, which will allow me to raise capital.

3. The goal is to create a machine that converts $1.00 into $1.20, or more.  Analyze your accounting data, insure you have a nice emergency fund, and if you have created that machine then feed as many dollars into it as you can.

4. Temper all this with the fact that you have only been in the business for 3 years.  It won't always be this easy to create cash flow and appreciation.  This market will shift, make sure you are prepared.

Nina Hayden · Answer

LOL I remember that thread!

Joshua-  seriously, take a mini break and go enjoy life with your wife.  You’re both young still and it seems that while you’ve had your share of marital problems, you both have done some great business decisions.   Talk to her, she’s the one that matters, not other’s opinions.  She’s the one that has to live with you and all the  decisions you both make.  Nothing anyone says here will matter is she’s not on board with it.

Joshua D. · Answer

@Bryan Devitt Thanks Bryan i just have those days where i worry alot.  Thanks very much for the response.

Joshua D. · Answer

@Nina Hayden Yes we are gonna take it easy for a bit and try and relax. That was a long time ago the stress from the business got in the middle of are marriage haha. But thanks so much for the awesome response.

Should i have anxiety with all my debt and business model?

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