how much debt

Question

I am getting ready to close on my 4th house within a year. I had a goal of 20 houses by age 50. I am 43 now. I have been moving forward pretty quickly acquiring good cash flow and equity. It suddenly occurred to me at 10 deals I will have $500,000. (Roughly) debt on these properties. I know they will be paid down some. If I am averaging 40% equity on each house, do I need to worry about the debt if I have positive cash flow?  Any advice? Just don't want to do much too fast.

Chris Mason · Answer

40% equity across your real estate assets is conservative and safe. I'm not supposed to think about age (gov't thinks I can just turn my brain off and not notice relevant/pertinent things...), but between you and I, I note that you're closer to retirement than some of our other posters, so there's nothing wrong with being conservative and safe with your nest-egg that you are still continuing to slowly and safely build up.

I've got guys (gals tend not to do this) that call me to pull equity out every time they think one of their homes has appreciated another 15% because they constantly want to be mortgaged to the hilt and have as much liquid capital as they possibly can to go make the next deal happen... So these guys are perpetually at 25-30% equity.

65%+ equity across all real estate assets? Eeeeh you're probably leaving some money on the table by not putting some of that equity to work, but that's still not crazy if you're being conservative and maybe your 401k/IRA in 2015 didn't do what you thought it was going to do.

Thomas S. · Answer

I generally hold the opinion that if you are worried about debt and lose sleep you should not be investing. Accumulation of wealth is not worth the hassle if you are not enjoying every aspect of the game.

As for holding equity in your properties is concerned as long as you are taking money off the top to provide a return on your equity, before calculating expenses, debt repayment and cash flow, then there is no major problem having money lying dead in a property. It is however the most inefficient way to grow wealth short of hiding it in your mattress.

James DeRoest · Answer

Exactly, and it's this where a lot of people insolvent - their income was somehow linked directly to the property game, either realtors, General contractors, contractors like siding, etc.

Although they technically could service the debt with their main earnings, when the market went down, so did their earnings and ability to cover the bad months.

For the OP, do what we're doing, open another unrelated business to generate income. My goal this year is to add another another income stream in a different business, currently at "shaking out the couch cushions for money" stage.

Rich Baer · Answer

@Troy Forney

Troy,

It's not the amount of debt you have on the properties. It's your ability to pay the debt from your own pocket when things go bad again. You should lose sleep if your cash reserves are an issue. Unfortunately, it could be as early as 2017 when the economy goes the other way again.

Rich Baer, Esq.

Troy Forney · Answer

thanks to all for the replies.  For now I am fine. I guess if I start getting nervous I just pay some down. This all makes me feel better to know what ever else is doing.

David Faulkner · Answer

If having $500,000 mortgage debt makes you lose sleep and worry if your tenants will pay on time and in full, then it is too much debt. Only you can answer that question. Everyone here can tell you you don't need to worry about it if everything is positive cash flow but that won't keep you from worrying if you are inclined to do so. I know this because my mom was one of those folks who couldn't sleep at night if she had a mortgage and a tenant didn't pay, and no amount of me trying to convince her that there is nothing to worry about did any good. She was actually a fantastic investor, but very risk adverse, so built everything up debt free ... took longer, but her portfolio was/is solid as a rock.

James DeRoest · Answer

Equity is worthless. If the market drops, it's your equity that goes down, so you will have less to ask the bank for if you ever needed to start covering your position. 40% equity can disappear in a heartbeat, like it did in 2008.

The only thing you can do if you find yourself sleepless at night is to pay down the mortgages faster and harder. We have a couple of financed properties, where we pay practically everything collected in rent to the note. We then cover insurance, taxes, downtime and repairs personally, but each note will be paid in full at the 4 year mark on the nose.

Jerry W. · Answer

Well I have over twice the number of doors you have and over twice the amount of debt hehe.  Does that help?  My view a few years ago was the more debt I had cash flow to cover the more my net worth would be someday.  I will either be a millionaire or broke, hehe.  I think the most important thing is to have good debt rather than be concerned about the size of the debt.  My market is getting hammered now but I still believe my expansion was a good idea.  My properties are not making a lot of money but they are all on 15 year notes.  The great thing about your equity situation is you can refinance or sale some and consolidate to get payments down if things get rough.

how much debt

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