What is Considered Being "Over-Leveraged" in Real Estate Terms?

Question

With all of the different financing options out there, I was curious as to what would be consider being over-leveraged for a Flip-to-Hold strategy?

I know that there are many variables to this, but it there a good or safe rule of thumb to go by when you are expanding your RE portfolio?

The savvy investor will tell you one thing, the lender will tell you another, and the agent will tell you another. What is your expert opinion?

Frank Jiang · Answer

Interest Coverage Ratio: Ability to pay interest on outstanding debt

EBITDA (Earnings Before Interest Taxes Depreciation Amortization) / Interest Expense

> 3 is good ; < 1.5 is bad

https://www.biggerpockets.com/forums/48/topics/207...

Greg Rutkowski · Answer

Thanks David.

David Dachtera · Answer

@Greg Rutkowski,

Yes - "flip" means buy and resell for a profit. To avoid undue scrutiny you should add some value first if you do a lot of it. That's basically a "fix-and-flip" - nothing extensive, just "lipstick on a pig".

A more "extreme" form of that is rehabbing: buy, repair / rebuild / remodel / expand / etc., resell or possibly even hold for cash flow.

What you're describing is actually called "Buy-and-Hold" in the REI community: buy, fix / rehab, hold for cash flow.

David J Dachtera

"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."- DJ Benedict

Greg Rutkowski · Answer

That is a good way to put it, thank you.

JD Martin · Answer

You're not really flipping if you are holding. You are definitely over leveraged if the portfolio as a whole has no equity, and over leveraged on single properties if the same holds true - the equity cushion you leave behind in a property can be the difference between walking away clean in an exit scenario and pumping your own cash into the deal. If the original buy & rehab was right, your equity cushion was paid for when you bought the house, so ideally you don't actually have any capital sitting around doing nothing, but have the benefit of the safety valve through shrewd buying & rehabbing.

Greg Rutkowski · Answer

THANK YOU! That is exactly what I am looking for!

Greg Rutkowski · Answer

Corrrect. But I'm looking for the actual ratio number of what is consider over leveraged.

Kalo (Kyle) Atanasoff · Answer

It simply mean higher LTV ratio. With other word, you have very very small (if any) equity.

Greg Rutkowski · Answer

Hi @David Dachtera

Flip-to-hold in terms of: I flip properties and hold them for long term cash flow.

When I speak of over-leveraged I am talking bigger picture (my portfolio as a whole).

David Dachtera · Answer

"Flip to hold"? Does that mean you are flipping a property to a buyer who intends to buy-and-hold?

"Over-leveraged" would generally mean the property is encumbered in excess of its actual value: Fair Market Value based on CMA or on income, depending. "Under water" might be another way to put it.

David J Dachtera

"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."- DJ Benedict

What is Considered Being "Over-Leveraged" in Real Estate Terms?

What is Considered Being "Over-Leveraged" in Real Estate Terms?

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