How to feel comfortable accumulating so many rental properties?

Question

Hi fellow investors. I wanted to see where everyone's risk tolerance is with accumulating multiple rental properties over time. I currently have 2 rental units (fun and addicting!) but I am a bit hesitant to keep going because at some point, your risk goes up with each property.

Let's say you have 5 cash flowing properties (+$800/mo ea) and you refinanced out at $200k mortgage each. That is $4,000+ positive cashflow each month. That is awesome and exciting but in the back of my mind, I think I am now on the hook for $1M+ worth of mortgages! Sure I can save 6 months PITI in my reserves for each unit, etc but you are still on the books for $1M in debt. Just because it produces money (asset) doesn't mean it isn't debt. What is everyone's view on this? Am I just being paranoid?

FWIW, I had 6 months PITI reserves for my 1st unit and then the pandemic hit. My tenant didn't pay for almost a year (due to eviction halt) and when they were finally evicted 12 months later, my house was trashed ($15k+ to fix). The costs were bad but still doable for me. However, if I had 5 units at $200k mortgage each, and this happened to all 5 units of mine, I would've been in real trouble. I doubt another pandemic hits in our lifetime but you just never know.

What does everyone else think?

Brendon Pishny · Answer

@Eddie L.I would actually argue that you’re more at risk with less properties. As long as you stay in a good position like less than 65-70% LTV. If you only have one or two rentals what happens when one tenant moves out or stops paying. You have to make sure you can cover the mortgages. If you have 10 or more the chances of having enough units empty long enough not to be able to cover payments is very slim. I have 13 properties leaveraged at about 55% and feel very comfortable. Hope that helps. I agree buying properties is an addiction. But at least it’s a good, money making addiction😉

Joe Villeneuve · Answer

1 - Good debt makes you money, bad debt costs you money. Don't lump them in together as if they are the same thing.2 - Your tenant is paying your "good debt" from the rent money. The more properties you have, the more "other properties" you have CF coming from to cover a month or two of vacancy.3 - Risk in a RE investment isn't the loan...it's the equity...and the potential loss of it. Just ask any lender.

Mariel DeVito · Answer

@Eddie L. you are not kidding about it being addictive and I too am in a point where the debt is overwhelming my husband (although ironically, he is not financially funding any of my investment property). I am plugging along because I have my eye on one end goal - be able to confidently walk away from W2 and pursue more investment ventures so in the next two years, I plan to keep leveraging the equity of my properties while I can. Once my $ monthly target is met, the plan is to start paying off the debt.

Joshua Janus · Answer

If you have one property and something goes wrong and you need capital quickly, you have limited hard assets to leverage to fix your situation. If you have 10 properties and one of them is having issues, you have all of these other small 'businesses' to borrow money from quickly and get the original one back on it's feet. You also increasingly mitigate your risk against long term vacancy every time a door is added to the portfolio. I would say make sure to have a low LTV for a few of your properties so you can pull equity when it is needed. For those that have 50+ doors that I know, they don't have 6 months of PITI payments in cash reserves for each door.

John Morgan · Answer

It’s all a risk. And I’m ok investing in the stock market and RE. Over time it’s all in your favor. I’m at 1.2 million in loans off 12 rental houses. Cash flow is 7k/month net now but I know it could be zero or negative if we have another pandemic and tenants get to stay for free. Could that happen? Sure. But I’m betting against that and not worried. Numbers don’t lie. And in RE, numbers will build you massive wealth if you scale up a little and leverage. But it’s all about risk and your comfort level. Those who don’t want to take risks and leverage should follow Dave Ramsey to sleep better at night.

Peter Tverdov · Answer

Just make sure your global LTV is low enough that you can refinance something in case of emergency and 6 months of reserves per property is a MUST.

Theresa Harris · Answer

If you have properties with $800/month cash flow after all your costs that only have a $200K, you are doing amazing.You get problem tenants from time to time, but they are usually rare. I had two back to back (second was during covid). With the first, I looked at it as an opportunity to increase the rent to market value (it is in an area where there are limits on rent increases).With multiple rentals, there is more risk, but also if one is vacant for a month, you have income coming in from the others to cover any shortfall.I don't like debt, but I don't see mortgages the same as I do other debt (eg credit card). Each person has different comfort levels, so do what feels right for you. If you buy wisely, then the risks are low.

Kerry Baird · Answer

When I have one rental I personally have a lot of risk: when there is damage or a vacancy, it is all out of my own pockets.Now that I have a business that owns a lot of houses, every 3 or so pays for a 4th. I can have a vacancy and the others bridge the gap.