All Forum Posts by: Andy D.

As @Jonathan Safa has basically said: it depends on the situation = on what you want. If putting down only 3.5% results in you saving so much money that you have an amount large enough to make that saved amount work as another downpayment and you want to and can afford to expand (reserves, manpower etc) and the resulting rate of return offsets the MI cost then that's probably the way to go in the current environment, knowing that interest rates will rise significantly fairly soon.

On the other hand, the whole focus on interest rates is something I consider to be secondary for an investor, at least when looking at a spread of maybe 100-150 basis points, i.e. 1-1.5%. This is not going to break the bank if the overall picture is right.

And if you intend to "flip", meaning fairly soon refinance anyway due to the fact that the place is either sold and something else is bought or you do a refinance or whatnot then the point about the interest rate becomes moot as you will have to deal with a changed environment anyway. A homeowner trying to secure a 30 yr mortgage on his primary is a totally different story. They probably want to buy now, rather than in 6 months.

And don't forget that all this also depends on whether one can qualify to get the financing that one is thinking of getting. ;-)

@Joseph Hennis I think it has become clear in this thread that the majority of people is pro "moving quicker". The main reason is pure logic related to fact: the interest rates will rise. The market will, in turn, take a slight hit as regards speed of continued growth. I'm not saying it will crash but it will slow down a bit. So loans are "cheap" (comparatively).

At the same time the equity you have is not doing you any good. As @Thomas S. has pointed out it costs you money, effectively. While I don't see the big issue with your rent numbers (all depends on the individual situation of all people involved there) I would definitely pull out as much money from the units as is feasible with respect to a still ok LTV (don't overleverage; rents still need to support all costs) and then use the money to make use of the current interest rates by getting mortgages, meaning of course: buying something. What that something is is completely dependent on what you want to deal with. And obviously on the market/availability. Those are my five cents.

@Danny N. Oh boy, you're opening a can of worms here! ;-) It's like asking if beef jerky is yammi or not! LOL

As far as I am concerned there is no "right or wrong". It depends on your situation and what you are comfortable with. I prefer to leverage as I'm in a high tax bracket. Every dollar I can save on that end by deducting things (that make me money!) is worth my money, literally. I like to make my money work, especially if it's not really my money but the bank's.  As long as the return from that borrowed money is higher than what you pay for to get that money (= debit/loan interest) then you are making money - leaving aside the associated benefits from (further) deductions and whatnot (potential rise in vaule and so on).

I do disagree with @Audrey Ezeh as regards her statement "it's the leveraged ones that will suffer more in the down turn". No, they won't. Why would they (as investors). As long as the overall personal situation is right and you are making money from the leveraged properties up to (and preferably more) the amount that is owed on a monthly basis then all is good. This is true for investors.

It will, most likely, not be true for non-investors, i.e. owner-occupied properties where people have the tendency to over-leverage and then are way over their head when something goes wrong (= lose their job) while at the same time having no reserves but additional debt (credit card, car loan, etc). Yes, these people will have a problem. Not us investors if and when it's done right. So while the above quoted statement is true, it is not true in the general way it was written. There is more than just black and white.

Soooo, what should you do? You need to decide. I, for one, just pulled out some 100k from a property by refinancing as it has increased in value a lot. Why? Because

a) I can support the increased mortgage payment from that property alone, not to mention by "subsidizing" it via the cash flow from other properties and income sources if need be

b) the value currently allows me to do so; maybe no longer 10 months down the road and

c) because I now have an additional 100k sitting in my bank account that I can use to scoop up a good deal if and when one comes by.

This money is cheap. Yes, it doesn't earn me anything while waiting in the bank account but also inflation is still low. And I don't plan on having it sit there more than a few months. It will get invested. But I'm ready for the opportunity. You are probably not in that regard, are you? ;-)

Oh, and should anyone cringe at the point b) above: I don't care if the property is worth less in 10 months than what I currently owe. I can pay the mortgage. This will not change. I just wait for the value to go back up while at the same time making positive cash flow. Every. Single. Month. And if something bad happens I have enough reserves. During all this time I am using the money I pulled out to by having bought something else that makes me even more cash flow.

I yet have to come across a situation where someone is telling me that this doesn't make sense financially.

Very long story short: It depends on the risk appetite, the overall personal (financial) situation, the type of investment (they do need to be good ones!) and yes, maybe a bit of luck too.

But I am indeed going to say this: for those who do not have sufficient financial reserves, do not over-leverage. And no, unused equity in a property is not "reserves". Only if and when you pull it out. The value could drop significantly tomorrow and then your "untapped reserve" is gone. We have seen it not too long ago.

I would be interested in that as well. I would be a bit concerned about the tenant class, their (steady) source of income and the associated potential problems in such regions. But I have also not yet looked at the market there (I'm further south), i.e. what units sell for. You, @Ben Clayton seem to have done so and believe it to be worth a shot. What's the average rent in these areas for, say, a 3/2, 2/1 Townhome? Or did you only look at SFH? Possibly multifamily?

@Joe Pitrolo Precious metals, especially gold, are considered to be a "safe haven", somewhat of an anchor in a well diversified (bank) portfolio. It is supposed to steady or even equal out opposing negative reactions from especially stocks. i consider this somewhat similar to RE, although I clearly prefer RE due to its cash flow. But historically it was much more difficult to include RE in a portfolio with securities since, back when, there were no REITs or similar things.

If and when someone does not want to or cannot include RE (in whichever form) in a portfolio with a bank, they should, most likely, indeed have some precious metals in there. If, however, someone includes RE (e.g. via a REIT) or has RE as direct investments (as we do here) then I see no point in gold unless one is aiming at a capital gain. Precious metal are, to me, like too much equity in a property: it doesn't earn me money. Actually, I might even lose money with it as it is subject to market action. Just like a stock. But the latter, more often than not, pay a dividend (leaving aside the obvious exceptions such as Berkshire).

In any case: it's about diversification. And precious metals play a part in that. And there are plenty people out there proclaiming that one should sell everything and put everything in gold. That is the opposite of diversifying, and in addition gold is really, really tough to chew on...

Us, walking the occupied unit: "Why didn't you inform us about the water leaking from the 2nd level toilet into the downstairs bathroom?" (causing water damage on the floor/ceiling and walls, very noticeably so)

Tenant: "I didn't want to bother you with this."

Ahem, ok... But now I'm REALLY bothered because I have to fix all this for much more money and time than had you informed me immediately. Thank you very much.

Not.

Hal, ok, I see what you are doing or rather what your assumption is: "relever every time your properties go up" - you are assuming - with these people - that EVERY property is ALWAYS re-leveraged to the max. I thought I had made my point clear that I do not believe this to be the right way by saying that one should have sufficient cash-flow and reserves and be diversified. If this is not the case then this could be a problem. I still don't think it will always be a problem for an investor who knows what he/she is doing, see my previous posts, focusing on the fact that rent is coming in from tenants who need a place to stay.

As this can be open for interpretation let me describe what my situation currently is: I have various properties in different areas, all of which were bought with a 70% LTV, i.e. I had - from the beginning - 30% equity in them. This 30% has already gone up in every single one. For at least two places the LTV has turned around to be some 40%. Every single one is cash-flowing positively, fully occupied, B/B+-neigbourhoods with high tenant demand. In addition I have a well paying W-2 income stream and cash in the amount of slightly less than what I have bought one of the places (that now have the 40% LTV) for.

I have just pulled out equity from one of the "40%" units to bring the LTV back to 70%. This money is sitting in my bank account, waiting to be invested, together with whatever other money I have sitting there beyond the required reserves, to be invested when a good deal comes by.

Are you now telling me that my re-leveraging of this one unit (heck, it could be even 2-3) is going to break my neck? I have a hard time believing so. Because: why would it? The re-leveraged unit is still cash-flowing positively. If I were to lose my job I have lots of cash in the account to pay any and every mortgage for months to come. Not to mention that I don't even need to use that money as I have tenants who pay rent and who PAY ME to pay my mortgage. Yes, some tenants might no longer be able to pay and I have to evict them, losing rent and having to shoulder the associated costs. But so what? I'll easily find new (better...) tenants and all will be back on track - no risk no fun. How will this ruin me? I'm not seeing it.

Now, let's look at the other side of the coin: if you are entirely dependent on your income source being from the rental payments, you have them leveraged to your nose (= high mortgage payment), you have little to no reserves and possibly your properties even being in a state that begs for repairs with additional debt (credit card etc) then hell YES, this is going to be a problem if the market turns AND you have tenants no longer being able to pay their rent (issues see above). BUT, are you saying that the majority of investors is going about investing as described in this pathetic, to-be-doomed path? I cannot believe this. But I might be wrong...

I shall re-emphasize that the main problem will be with non-investors who are way over their head by going the route of FHA/VA or even conventional with 90% LTV (where possible). THESE people will, in all good reality, lose their houses as they typically are not able to have sufficient reserves when losing their job, not to mention that they have other debt, such as credit cards, students loans, car loans, etc. This is where the problem lies. Not, in my opinion, with the majority of your average investor. Granted, those who live off of 12% HM are probably going down the drain but really, who cares? This is not the majority, and we good people do need something to chew on once there is some road-kill, wouldn't you agree? :-) I don't consider this a bad thing. This is just how it is: a winner in a market always requires a loser on the other end of the equation!

Interestingly enough we are actually somewhat off-topic as we are not talking about whether a crash will happen or not. Then again, as I have said plenty times, I don't care. Let it come. This is how I started out in 2008. Everything in this world is subject to a cycle. Trying to time it, as has been correctly stated, has been proven to be impossible. It will go down. Sometime. As I have written above somewhere: just be prepared to turn left or right before the cliff shows up and don't follow the lemmings down the cliff. At least not without a parachute. ;-)

Are we all doomed who remain invested (in real estate) and are leveraged? My belief is: no, we are not. If we do it the right way, see above.

 Exactly my point.

Hal, it does make sense when you look at it from the point of "overall investment success". I think that Greg's position and logic is that a) if you pull out the equity AND b) make this equity work for you then you are safer with respect to "business success" than if you had not pulled out that equity with the market going down and you no longer being able to use that equity since the value of the property has decreased and you're now back at the minmium LTV.

Again, stating that "pulling out equity is more beneficial" is probably only true if you use that fresh money to invest. But this is what an investor does: they leverage and use the money for more investments. At least those who want to move ahead.

Maybe an anlogy helps: you buy a dividend paying stock at 100. It goes up to 120. At that point you sell 20 worth of this stock and buy another, different dividend paying stock for those 20 and maybe some additional money you have lying around. You will now have not only diversified (due to you now holding 2 instead of only 1 stock) but you will have also increased your cash flow as you have added a second dividend stream. Now, if you didn't sell at the point when the first stock was at 120 and it went back down to 100 then you are back at square one, with no diversification and no additional income from the second dividend paying stock . Selling those 20 worth of stock is equal to pulling out equity on a property. And I would believe that you would not have any objection to pulling out 20 from a stock to buy more and capitalize on a capital gain?

I do concur with you that you are, by increasing leverage, reducing the overal solvency. But as I have stated in my other post, I do not consider this an issue if the overall picture on one's personal financial situation is sound. AND one is sufficiently diversified (be it only within RE).

I tend to agree with @Hal Thompson regarding the comment about doing well "in the valley" as well. Doing well when everybody and everything is doing well is the bare minimum. I can't even call it success since everybody, apart from the necessary losers, is having the same "success" by merely following what the masses are doing. Being truly successful, however, is to predict when the lemmings are going to fall off the cliff - and making a turn in time to avoid following suit.

Regarding (over) leveraging: I'm not convinced that this necesarily leads to a problem. Because, if cash flow and possibly otherwise existing funds can sustain the mortgage payment, I - at that point - do not care how much my property is worth and how high my mortgage is and whether it's techincally overleveraged or not. This only becomes relevant if I need to sell. If I do not need to sell then I simply do not care and sit it out. It's like a stock that tanks and is worth less than I paid for. Who cares. If it's a generally good investment I wait for it to go back up. This even more so if it pays a dividend (in real estate terms = positive cash flow).

However, this will probably only work if one does not only have 1 property and is not totally dependent on the rent coming in to pay the bills. The 2008 crisis with people losing their homes did not start with investors. It started with owner-occupied properties with ridiculously high mortgage payments and people losing their jobs and having NO reserves whatsoever to pay the mortage during their time without a job. At that point those people wanted/had to sell. But guess what: they couldn't or at least not at an amount that covered their mortgage. And this is where the s*** hits the fan. For these people.

Again, the problem lies with the masses who are not investors. An investor should not have an issue so his leveraging situation is not all that relevant. At least this is my current opinion. And I'm coming from a point of view with several properties and sufficient reserves and income.