Recession proof leverage?

Question

Hey I’m new to using leverage, but not new to real estate investing.  I’ve been a long time cash buyer and Dave Ramsey listener.  But I’m seeing the flaws in this mind set for people who are financially disciplined and know how to use debt in a responsible way. I’ve just recently started using leverage to scale my portfolio to an earlier retirement.  Of course nothing is full proof but I’ve been trying to stay around 50% Loan to value on all my properties.  Of course this does not mean I have all of them 50%. (Some more some less.) but overall 50% I’m wondering if some of the more veteran investors could comment on this philosophy.  My goal is financial freedom like most,  if I use more leverage I could get there several years earlier,  but I also like to sleep at night.  Of course everybody is different but wondering some general opinions if people think this is too conservative. Thanks much appreciated. ￼

Nicole W. · Answer

@Joe LeGolvan

I believe one should do what one feels most comfortable with and that makes sense to one.

Earliest on we bought an apt building leveraged 100% (borrowed from a family member). All the basics were there with a few tenants but it needed work. I worked on it while my husband worked a job. We just used the rents we made to fix the next thing etc. We didn't do major rehabs...just kept fixing the units as they were vacated one by one and otherwise maintaining it. While I worked, my husband took over doing this and maintaining it and our other properties.

Next we bought a few SFRs with 95% leveraging. At that point I had a good paying job so it was helpful taxwise and if money needed to be put into them or had vacancies, I was able to compensate for that between the cash flow and my own income. Our CPA always told us we paid the lowest taxes of any of his customers. We had some good and bad happen with those houses. Just prior to 2008 the insur and taxes went way up (due to values escalating & bad weather) then the market crashed and rents went way down. I was too leveraged and had to let some go. I have 3 of those left which cash flow some and they are getting paid by tenants but its a long haul. About 8 yrs ago, we decided to follow John Camuto's program and just worked hard to pay off all debt and did except for those 3 original rentals. We decided to just leave those as we have paid down enough of the mortgage interest that they are essentially lower % than the current rates.

2 yrs ago something major changed at my job and it was no longer aligned with my purposes. I decided I wanted to do some training I have always wanted so we decided to just be economical and live off the cash flow we had coming in. We were able to do this as had absolutely no debts left besides those 2 houses. We had paid everything else off incl the apt and our house. Due to this I was able to just leave a great paying job and do something I just wanted to do.

When Covid hit, we had no problems at all as we had already set ourselves up to be viable. During this time, I couldn't continue with my training so did some researching and decided to 1031 exchange the apt to something newer. We just wrapped that up and now our income doubled through this. These new ones are all paid off. We know we could've bought a ton more and leveraged a bunch with low interest but we didn't want to do that. We want to just be free to do other things we have wanted to do.

So, that was our decision and we had others tell us how we could be making much more in the future. We looked at a lot of different angles on it and at this point in our life this works for us. Roll back the time 20 yrs and yes, I would've gotten more probably.

It took us a longer time than you probably want to take but there is some info for you. I will say when we decided to pay off all debt, we really felt liberated and our finances got a lot better but I honestly that was the right time for us to do that. If I had to do all over again I would have bought the apt as I did. I would've been way more cautious over the amount of houses I bought all at once at 95% and where I bought them. I would've still waited to pay off our primary residence until after these were all making good money then paid it down as I did. I would've figured out how to fully rehab the apt sooner on and had it making more than it did.

I hope this helps.

Joe LeGolvan · Answer

@Nicole W. Thanks for your answer