What is Overleveraged?

[Jason V.]

This thread is inspired by an ongoing debate: Possible to grow without debt?

My question isn't whether I should use debt or not - it's how to know when I am over-leveraged. 

I know there is a degree of personal "feel" to this, but I'm looking for a way to even put a number to it. I think it would be a factor of cashflow, equity, and reserves, but there seems to be a very clever and helpful way to calculate everything in REI already - I just haven't seen anyone talk about this.

[Roy N.]

@Jason V. @Mike Makkar

Over leveraged has a specific meaning in business finance and is not a matter of personal comfort.

Over leveraged is when a business has taken on too much debt and is unable to make the {interest} payments on its debts ... or more generally is unable to pay all of its expenses due to the debt being carried.

The amount of debt load you as a business owner are comfortable carrying is an important metric to understand, but that is not the point of being over leveraged.

Similarly, the limits that lenders impose when financing properties (Loan-to-Value) has to due with risk mitigation from the lenders perspective and may be done in an effort to keep the borrower (a business) from becoming over leveraged.