What Leverage Ratio (D/E, etc.) Does Your Small Regional Care About?

[Bryan Hancock]

For those folks that believe in carrying debt on their balance sheet to finance long-term rentals I am wondering what ratios your banker cares about. I have heard they like to see 10%+ of your long-term debt in cash. I have also heard that a D/E exceeding 3.5ish is a red flag.

We are currently carrying about 11% of our long-term debt in cash and have a 1.34 D/E ratio for our overall portfolio. My goal in the near term is to adjust this to 20% of long-term debt in cash and 1.00- D/E.

With banks starting to lend money again I am more interested in what your bankers like to see to continue financing your operation. We are developing property, doing rehabs, and buying rentals. So our long-term debt from rentals needs to be balanced with the ability to borrow in the short-term from banks for development and rehab deals. We have JV partner options and private lenders, but this money is more costly than bank debt and the supply is less plentiful. I would also like to try to start designing additional investors out of our personal deals and save those relationships for larger CRE deals we do through our fund.

Any advice or commentary is appreciated.