How much debt is too much

Question

I am a former Dave Ramsey fan who as very warily converted to the Robert Kiyosaki "Good debt" thinking. Had $418,000 in debt five years ago and will be debt free ($28,000 left) in May 2019.  After weeks of research I am now OK with getting into real estate to speed up my accumulation of wealth( age 53). After watching several of the podcasts its seems that as long as each property is cash flowing, no one seems to have any limit as to how much debt they take on.  What are the really bad things that can happen with the large debt loads that some people have.  Some podcast guests seem to be millions in debt.  Because of of the cash I have available and good credit I can run up the number of properties very quickly.  I need to plan how to use my resources with some idea of debt limit in mind( I think). I am currently reading the millionaire mind and the millionaires interviewed specifically are debt averse. This almost sounds too good to be true.  Please let me know your thoughts. Waiting to take the leap.

Kelvin Tam · Answer

Another method is by using the Bigger Pockets calculator tools. From there, you can know if your investment is bringing you positive cashflow and the debt that you are getting is a good debt.

Ashish Acharya · Answer

Joseph,

I have audited/ seen multi-billion dollar company take Millions of debt. Without the debt, there would be apple or Coke. Have actually audited Coke.

The reason I am saying that is becuase people go under the water when they fail to manage/project cash flow.  Big Corporation will have CFO and highly educated accounting department to manage their debt.

Individual needs to do the same. Yes, we dont have Stanford graduated, 30+ year experienced full time CFO on our team(neither required), but that's when you go talk to CPA/CFP to give you the right answer if you are managing your debt carefully and how much you can leverage given your risk tolerance.

It is already mentioned here . You can leverage but you need to at least have these set up:

1) emergency fund

2) reserves

And, if you can talk to a CFP on the Risk Management/Debt management/ Long term goal management, leverage is an excellent tool to scale up fast( and safely)

John Thedford · Answer

If you have so much debt you cannot build reserves it is too much. If properties go vacant and you cannot afford the mortgage it is too much.

Michael S. · Answer

@Joseph Charles

Your one comment here concerned me:  "I can run up the number of properties very quickly"

That is a red flag for failure.  Just going out and buying a bunch of properties because you "can" is not the way to do this.

First, figure out your business strategy.  Buy and hold?  Flips?  BRRRR?  SFH?  MFH?  Business partners?  Loan strategy (ARM, 15 year, 30 year, line of credit, HELOC, hard money, etc)?

Once you have your business plan, figure out your location to focus on - local?  Growing market?  Turn key OOS?  A, B, C, D class properties (would strongly recommend against D class for a new investor by the way).

Then, once you have your plan, WAIT until the right deals present themselves.  It could be 3 at a time (very unlikely but does happen) or one every 6 months.

How to avoid going bust?  Avoid "settling" on properties that don't fit your goals.  Never buy a house you couldn't sell tomorrow and get your loan paid off at least 90% in full.  Stop buying properties if you could not pay the monthly debt payment on the notes on ALL properties simultaneously for 3 months without wiping out your savings and other investments.  Avoid high risk properties (some C and all D class) until you are experienced.

This is not an exhaustive list but will get your started

Good luck.

Ian Tudor · Answer

@Joseph Charles - Debt or leverage is the beauty of real estate. However it can your worst nightmare as well. Debt merely amplifies what you already have. It shouldn’t make or break a deal.

My theory is to value deals conservatively with no debt and if the numbers make sense it will only get better with debt.

Non recourse debt is better than recourse, but I wouldn’t be scared to use it recourse for a good deal. I use plenty of recourse and I have thought deeply of transitioning to non recourse. There is a point where recourse debt will have a diminishing return on your ability to grow. If you are just starting out you are likely far away from that.

I know you are looking for an exact answer and this will depend on several things. I don’t have that for you. First purchase a few good deals and then reevaluate.

Matthew Paul · Answer

$1.00 could be too much debt for some ,  It all depends on you .

Andrew Barrios · Answer

I haven't bought my first property yet, so this may not be any help... My opinion on this is "it depends". It's probably not the answer your were hoping for, but it's the best I've got. It really depends on your risk tolerance. If you're ok having a bunch of debt and it doesn't scare you, then rack it up, but if you think you're going to have trouble sleeping at night because you're afraid of some sort if event that will leave you bankrupt all of the sudden, you should probably keep from accruing a ridiculous amount of debt.

IMHO if your monthly cash flow is high enough to net a positive gain every month, consistently, without fear, your doing just fine.

Joseph Charles · Answer

Thank you everyone! Great replies.

How much debt is too much

Most Popular Reply