At what point am I concerned about too many mortgages?

Question

Greetings BP members,

I am looking for a little feedback.

I do flips in San Diego and have had some success in wholesaling outside of California. I have found that even though the cash flow is nice, what I am really doing is just buying myself another job with each flip. I am now moving my business into a direction of Buy and Hold with the goal of passive income. I have a question regarding leverage. At what point are you over leveraged? As long as a property is cash flowing positive, Is it possible to have have too much money owed? Might be a dumb question but it seems that if you have done your homework and have a contingency plan for unexpected costs, it shouldn't really matter as long as the property cash flows each month. I would be interested to hear what you think.

Thank you.

Mitch

Federico Gutierrez · Answer

I would say somewhere between 4 and 10 for traditional lending. After 4 mortgages the banks will start asking you to show reserves of 6months for the existing buy and hold mortgages.

Long as you can keep getting them it's never enough. Much like Pokemon, got to catch them all!

David Dachtera · Answer

@Mitch Smith,

Others may disagree. My advice is to start out "right" and put your acquisitions into a business entity structure from day one for estate planning, tax advantage and asset protection. That way, you matter less than the quality of the deals where lenders are concerned.

As for cash flow, remember to consider vacancies. We're in a landlord's market right now, but vacancies will still happen.

So, whatever vacancy rate you can absorb should probably be your guideline, I should think.

My $0.02...

Mitch Smith · Answer

@Brian Pleshek, @Federico Gutierrez, @Michael Shea

Thanks for the advice. All good points. Seems there is no hard and fast rule. As suspected, much of it has to do with with personal comfort level and experience.

Thanks again,

Mitch

Brian Pleshek · Answer

If you're talking non-commercial properties, then banks tend to only allow 4 mortgages.  But if your wife has an independent income source, you could each get 4 mortgages(not joint).  A portfolio lender will probably allow up to 10 mortgages if the numbers are good.  After that, you're dealing with other strategies such as private lenders.  This is what you'll likely be allowed to have.

But you seem to also be talking about your personal comfort level and maybe a little math.  From a sleep at night standpoint, I can't really help you there.  You and your wife will just have to agree and if you don't agree on what is comfortable, then whoever is least comfortable wins.  Otherwise you can add extra stress to your relationship.

From a math standpoint, you need to know what you can afford.  Properties go vacant.  How many mortgages could you pay if properties started to go vacant at the same time?  Let's start off small.  I'll assume you have a house with a mortgage you live in.  Obviously, you can make that payment.  So you acquire another property and put in a tenant.  You're cash flowing positive.  The numbers look good.  But the tenant loses his job.  Can you make both mortgage payments for 3 months without a problem?  It might take a long time to evict your tenant.  If you're buying in California, they have some really unfriendly rules that I'll admit I know next to nothing about, but it definitely takes longer to evict in California than in Ohio where I am.  If you can make the two mortgage payments, how about 3?  While bad things can happen, I usually consider 3 to be my number when determining if I can afford vacancies.  Because unless you're really unlucky, you won't have that many vacancies at the same time(on small SFH or duplexes).  Also, know that these is safety in numbers.  If you had 80 units paying, and 3 went unrented, that is less critical than having 4 units with 3 going unrented.  The other 77 can help you pay the missing 3.

Personally, I try to have at least one property completely paid off with a HELOC on it but empty to assist with any payments due to vacancies.  Right now, I have 2 paid off rentals, so my loss due to vacancies are just on paper(except taxes and insurance).

Good luck,

Brian

Michael Shea · Answer

Until just before they keep you awake at night?

Guess it depends on the nature of the properties (residential, commercial), your D:E ratios in each, terms and restrictions of mortgages (avoid ARM's that expire concurrently), anticipated vacancy rates and trends, cash flow and reserves, etc. Bank' residential mortgage issuance limits aside (4?), I suppose theoretically, if each property can stand on it's own, with it's own reserves, etc., etc., then it's a matter of your own risk tolerance. I have more than one acquaintance that lost all their dominos to over-leveraging.  Rule of thumb among my most successful REI friends (who as a set tend to be very conservative with debt) is that if you have to have a mortgage, put 50% down to weather the storms. Also makes it easier to pay them off faster when times are flush.  I'm sure their CPA's disagree.

Mitch Smith · Answer

@David Dachtera

Thank you David. I appreciate the input. I have built a % for vacancies and repairs into my formula for configuring ROI. It seems to me that as long as a property cashflows, you are in good shape. With exception of certain parts of the country with over inflated markets. That is a different story.

Thanks David.

Mitch

At what point am I concerned about too many mortgages?

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