Leverage Vs No Leverage Revisited
Leverage is a very tricky way to amplify your returns as well as losses. This holds true in the real estate market and the stock market. Leverage is like steroids for a bank account at times. It is very powerful but can quickly make an over zealous investor blind to the reality of what they are doing. One of the first questions a person should ask themselves before beginning to leverage their rental properties is 'Do I have the personal income to sustain a downturn in my portfolio and am I willing to use my money to do so?'. The reason this is important is because if you have 20 properties and they are leveraged up to 90% in order to pull cash out and buy more, you are not leaving any room for a rougher cycle. Your properties will not have a positive cash flow at that kind of leverage so the money has to come from your personal income to support repairs, evictions etc. If you have a bump and have 3 or 4 properties go vacant or into eviction at the same time, you are now putting out about $3000 - $5000 per month until it is remedied. It creates a slow bleed on your bank account can eventually lead to a broken portfolio. Lower leveraged investors have the ability to sustain their properties with the cash flow from the properties alone. The problem is they can't acquire properties as fast as the higher leveraged investors. There is a balancing act that needs to be planned for and can be done by figuring out your financial situation before you start buying properties.
Ian Walsh
215.839.3271
Comments