LTV High or Low best in refinance?

[Greg Gaskill]

Recently I've wondered why I felt low LTV was better as an investor for long term survival. You don't want to be upside down or over leveraged if/when the markets change. But, that would seem to only apply if / or when you sell, or if the rental market tanks and revenues drop significantly.

So, if I have a sufficient cash flow and DSCR at or near 2 after refinance and cash out bringing my LTV to say 85% or 90%, and use the cash out to have greater capital reserves, and to re-invest in properties for additional cash flow, then why would this would be a bad thing?

I mean, if markets tank and the values of my properties have sunk, that doe not necessarily mean my rental revenues have tanked too, or at the same %. So if I still remain cash positive after mortgages paid I am not in danger of default, and if additional properties are bought with the additional cash out - say from 75%LTV to 85% LTV, then I've built additional security against default. It would seem that if rental rates plummet, and now my cash flow is negative, but I have greater cash reserves to survive such a blow, survival would be limited until either I run out of capital, or rental revenues improve.

Could there be a clause in a mortgage which states if the value of the property drops below the value of what it is mortgaged at the lender can take possession, or call the note, or change interest rates?

Looking forward to hearing from some of the pro's out there!

[Greg Scott]

The key to your question is cash flow.

If you are in an expensive market, you might have negative cash flow at 75% LTV. I'm not a fan of that, but many on this site are. Of course, you subject yourself to a lot of risk when running negative cash flow. If you have one hiccup (lose your job, major issue at another property, medical issue) the whole thing can come tumbling down like a house of cards. Conservative investors in expensive markets may want low LTV so the property cashflows. Unfortunately, low LTV usually translates to low ROI.

I like investing in markets where you can find cashflow at max LTV. My ideal scenario is positive cashflow at 100% LTV! That is an easy infinite return.