BREAKING NEWS: You’re not an idiot for using less leverage

[Scott Passman]

Alright, so it might not be "breaking news" but it's news to some. So many of the threads and forums I've read since joining BP in 2018 have pushed the power of leverage and maintaining a high LTV to boost your ROI and grow your portfolio faster. There is a faction of investors on here that have steadily urged caution and cited the risks vs rewards of leveraging up properties without adequate reserves, but in my observation they have been in the minority.

While I’ve always erred much more on the conservative side, when refinancing recently I struggled with the decision of whether or not to pull out as much as equity as I can and leave 20% down or stay more conservative to enhance cash flow and keep my leverage down. After running a lot of numbers, I ultimately decided to be more conservative and keep 30% equity in the property and use the cash out money primarily for additional reserves. The most recent turn of events has further affirmed that decision by giving me more long-term flexibility.

Now, I am seeing a lot fewer people on here advising people to max out LTV and many of the "conservative" investors are looking like RE oracles right about now. When I discussed my decision not to maximize my cash out at my last RE meet up, I was surprised by how peppered I was with remarks about missing out an opportunity to cash out my equity to buy more and the insinuations that I'd made a rookie mistake. While there are good reasons for and against higher leverage, this time serves as yet another good reminder of the importance of risk mitigation and reserves.

The downside of lower leverage is it decreases your return and slows down growth. The downside of high leverage is that you could grow too fast and lose your investment(s). I like the former more than the latter. We’ll see what changes come about in real estate on the other side of this pandemic, but hopefully investors as a whole will see how quickly unexpected events can occur at any time and put a little more importance on reserves and financial flexibility. You can’t thrive if you can’t survive.