I actually want to be more leveraged going into this??

Question

Let me start by stating I find truths in both the Dave Ramsey camp, and the pull out as much as you can via leverage camp.  I'm naturally conservative, but also have analyzed and utilized the power of responsible leverage to scale quickly.

Going through my portfolio to prep for the months ahead, I came to a surprising conclusion (and would love to hear your thoughts) that I actually wish I was I was more leveraged on a number of my properties.  Before this gets interpreted as terrible advise, the big caveat here is I have a white collar W2 job and reserves to cover a storm.  My portfolio has never been about "Get to $xx/month cashflow to cover personal expenses" - it's a long-term investment, cashflow being one piece of the overall investment.  So yes I've scaled aggressively with leverage, but I have the funds to ride out the storm and avoid a fire sale.

What I'm finding is in my more conservative properties - where I originally took something like 60% LTV after the rehab, and have paid down for 2yrs and also had market appreciation parlayed with forced appreciation - I have equity that I'd currently love to exchange for cash in-hand.

For example, a property worth 150-160k and I owe 75k, I'd much rather have a loan at like 110k on this and have that additional 35k in cash to create opportunity. I have multiple examples of this scenario and it adds up.

Because most of my properties are smaller (biggest property is a 6 units, most are 1-4), it's expensive to refi each one of these to pull out 30k here, 50k there, 25k on this one....etc and the reality is that private-type lenders for these SFH loans in an LLC name will dry up for the upcoming months even if I wanted to go this route.  I'm already getting notices from Chicago HMLs cutting back significantly, thus making cash even more crucial to make future moves.

This had lead me to play Monday morning quarterback and say, "man I wish I would've just taken max cashout on each one of my properties and have that additional cash on hand."  I would obviously would have a higher monthly obligation, but it seems like a more than fair payoff to have a larger War chest of cash.  Saying that out loud sounds kinda crazy though.

For those who were investing in 2008 (I was not), am I crazy to have this point of view? If so, I'm open to hearing it. I'm not trying to make a point, just relaying my observations because it's contrary to what I would have believed before going through this analysis exercise.

Russell Brazil · Answer

Leverage is good.....just make sure you have an amount of leverage that is manageable. Everyone these days is stripping their equity out of their properties because of the popularity of the BRRRR method. Myself and @Jay Hinrichs for the last several years have expressed skepticism that this strategy may make people to take on levels of risk in their portfolio that they do not understand and could not manage in a down economy.

Im one of the biggest promoters of believing that mortgage debt is one of the greatest things about real estate, but at manageable levels of 75% LTV or less.   I have very little concern with the current crisis as I am well capitalized, own low risk assets. But those with too much risk, may take a beating. Only time will tell.

Joe Splitrock · Answer

@Tom Shallcross I agree with you, the loans are not necessarily the problem. If you have significant cash reserves, you could make payments for years with no income. To ride a storm, you need either significant cash or cashlow. The less debt you have, the less of either you need.

Regardless you need to be cautious on the debt portion. Lines of credit can be frozen or revoked. Loans that are not fixed term can be called. That is what happened to Dave Ramsey and it is the reason be became the "pay cash" advocate. He had significant loans that got called and he couldn't find anyone to refinance them with.

Jay Hinrichs · Answer

Maybe your thinking HELOC's those got frozen and called.. Not ARMs  the other guys that got burned back in the GFC were those who had amortized over 20 due in 5.. and the bank that wrote that note went BK and some hedgefund bought all the paper and was not interested in making any new loans they foreclosed on a ton of folks with those types of loans or took deeds in lui..

Jay Hinrichs · Answer

In my mind really depends on the assets themselves if you have true equity after you refi.. or its just refi equity which can be no equity.

and for sure you have income to support some bad days or enough cash reserves or a few paid off properties that you can liquidate to prop up your cash.

Sean McCluskey · Answer

@Tom Shallcross it sounds like a bunch of investment property HELOCs would make sense for you. Less expensive to do than refinancing. You could wait to draw on then until you hear about banks freezing them OR until you see a deal you want to takedown. And the worst case is they get frozen before you draw and you're only out the credit pulls, nothing really lost but the opportunity cost of your time.

Ricardo R. · Answer

@Tom Shallcross I agree with you somewhat with a small caveat so long as you don't 'over leverage' just as @Russell Brazil mentioned, you should be okay with 75-80% LTV any more than that and you start getting into situations where you may start to over leverage. Cash on hand BEFORE a crisis or downturn is the key, if you think back to 2008... all those that realized they wanted to get in it while it was happening were too late... because although there were deals to be made banks would not allow it - so cash on hand before was the key to getting those deals.

I will say this however, quarterbacking and hindsight are completely different than actually being in moment. For example, how many times have we all heard 'Man if I would have just bought xx property in 2008 or invested xx money into the stock market during the crash' etc. etc. -- The reality is that Step 1: Having cash on hand BEFORE a downturn is important - Step 2: Actually following through during downturn... going one-way while everyone else is going the other... takes a lot of guts and determination. So most that say the above even if they had cash on hand back then WOULD NOT have invested during the downturn because of fear of being wrong or spreading yourself too thin - similar to right now... many investors are pulling out or 'holding what they have' to see how it plays out... Nothing wrong with either... but just highlighting that in the moment, when it's time to let go of those funds while everyone around you is running and screaming the other way and telling you not to and you realize that a good portion of your funds will now be illiquid for a bit... That is a personal mental hurdle that you must consider and weight in on in preparation.

Eric Bilderback · Answer

I agree whole heartedly with being leveraged.  But at a time like this I am all about paying the bills.  In my opinion that makes it so I can sleep at night.  I am not one of those “Greedy when everyone is fearful and vice versa.”  My Motto is "always be fearful the economy when times are good is always fragile and could be taken away with a single event.  And when everyone else is fearful there is probably a good reason they are all scared!”  Right now I guarantee I will miss out on great opportunities when I have hindsight.  If I see a deal that I just can’t see how I could screw it up and even if I did I wouldn’t lose it I will go for it.

However thats why I have never hit a home-run, I just try to keep getting my guys on base.

Travis Farleigh · Answer

I was not an investor in 2008 so perhaps am not the best to jump in with my thoughts here, but I think it very much depends on your loans. The reason so many people got burned in 2008, Ramsey included, was because the banks called all those loans due for people who were highly leveraged. As I understand it, that's still entirely possible for most ARMs, so it doesn't really matter if you can weather the storm to pay your monthly mortgage if the bank comes along and demands the full mortgage be paid immediately. On the flip side, if you can get your properties purchased or refinanced into conventional loans, there is buyer protection there that does not allow the banks to call the thing if you're making timely payments.So essentially, if you have the conventional loans, you should be well-protected to use a more aggressive leverage-heavy strategy. But barring that, it could be a huge risk.That's my understanding of it anyway, but I'm also open to more knowledgeable responses.

I actually want to be more leveraged going into this??

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