Putting too much down?

[Steve S.]

My goal is to buy 10 cash flowing rental properties as quickly and safely as possible. So far I have 4 and I keep 6 months of mortgage payments on hand and have a decent security net in place for maintenance etc. I know that leveraging a property with as little money down as possible would allow me to buy more properties much faster. However, I've noticed that I end up going the safer route by putting 20% down so that there is plenty of cash flow and therefore a little less risk. Also, I don't like to pay PMI but if the numbers make sense with only paying 10% does it make sense to pay it and take a little less cash flow? I know the numbers speak for themselves, but your opinions are appreciated!! Thanks!

[Bryan Hancock]

This is a new flavor of the same leverage debate that has been had in BP at least 100 times.  You're not going to get a solid answer to your question because the answer is that it depends.  On what you ask?  On a ton of things:

1.  Your overall asset allocation

2.  Your propensity for risk

3.  Your personal situation.  Do you have kids?  Are you saving for retirement?  Etc.

4.  How you generate outside income

5.  Your time horizon

6.  Your capacity to raise outside capital from lenders, non-traditional lenders, partners, passive equity investors, etc.

7.  The size of your balance sheet

8.  Your credit worthiness

9.  Your skill level with real estate

10. Your deal flow

I could go on and on and on.  Leverage is like driving a fast car.  You can get where you want to go much faster by driving the fast car faster, but you can also crash and burn in a ball of flames.  Whether or not you have the skill to drive the dragster at 300mph depends on how good you are at driving.  

More leverage is more risk.  A higher overall leverage ratio will siphon cash flow in favor of debt service, but it will increase your ROE if you are good at investing.  Making your dollars work harder is more important when you have fewer of them.  As you get more of them you'll likely care more about making more dollars each month than making them work hard.  This is a tradeoff that nobody can answer for you without having answers to at least the questions asked above if not more questions.  

In general I think people should leverage more earlier in their investing career and decrease their leverage ratio as they age.  When is this advice not sound?  Probably pretty frequently.  The reason is that it depends on so many factors that it is impossible to generalize.  However, people generally have a shorter time horizon as they age and thus less tolerance for risk.  Overall this is probably one of the dominant factors in deciding what is right for your personal situation.