All Forum Posts by: Jimmy Humphrey

For sake of comparison, I find it interesting that in the brokerage world, the most margin (leverage) they are willing to grant investors is 50%.  Especially considering that the brokerage firm has the ability to call the margin and force a sale once the stock moves too sharply to the downside to protect their interest. It's amazing to see the different degrees of risk various folks are willing to assume or allow.

I would like to add that to me, it seems if you are going to have a higher amount of leverage, it would seem prudent to be highly diversified with a couple property types in multiple regions if possible.  Even though I live in Charlotte, I've spent a lot of time doing loan mods and short sales in places like New York, New Jersey, Philadelphia, Nevada, Arizona, Washington, California, and Illinois, and have seen the possible trap of only being in one area.

I've seen landlords who were intensely renting in a certain geographical area get decimated due to the changes in the marketplace in their locality. Suddenly they had found themselves without tenants in multiple properties because many of their tenants worked in a lot of the same industries that people got layed off in, and found themselves having to deeply discount the price of rent just to get a tenant, but in doing so, were still bleeding.  I know in the apartment complex I was living in during the heart of the recession, the property manager started reducing everybody's rent by 10%+ because there was a sudden mass exodus of tenants.. and our rent was already pretty cheap for the area.

And with that said, it seems to me that you should create some wiggle room for how much you can afford to charge in the  absolute worst case scenario to make things work.  

I'd live to hear any continued feedback from you guys on this.  I know being a landlord across a bigger geographic region comes with a lot of unique challenges, and is something I would probably never be able to do. But it does seem like a smarter way to handle market drops.

Thanks for the insight @David Oldenburg  If you don't mind me asking, how much leverage do you look to employ when doing a deal?

As an underwriter for the GSE's for a living, trust me I understand what you are saying about wrapping ones head around some of the guidelines when trying to understand how they are layering their risk. Sometimes it definitely seems artificial, where a 2 bit politician clearly wrote specific guidelines. But in the same breath, having underwritten what must be thousands of deals now and learning to think like and underwriter, some of it eventually starts to make sense.  

It was a pretty long book and it's been a few years since I read it, but the tons of examples given were meant to be somewhat educational and serve something as a paradigm. It's like Dave Ramsey says, he learned about how to create and manage wealth by learning from those who had done both. 

I just picked it because it's a pretty popular well performing REIT. I have no holdings in it... yet

@Steve B. there does seem to be a bit of self assurance about how well one knows the market and employs the right technique. I'm not saying everybody is wrong and that there isn't some really good insight out there. But to me, if you can't point to a specific numerical level and say that such a level is dangerously highly and inherently risky, then I can't help but worry for that person. I've watched quite a few podcasts so far (not all mind you), and so far I've not seen any word of caution about what is considered too much debt. And reading the forum, it seems like most everybody is good with taking on as much debt and being as highly leveraged as possible. The sky seems to be the limit.

The only hint of a debt ceiling limit I've seen implied in discussions/podcasts is the limits that various banks decide to put on an individual. Such is a huge red flag to me. It's like when a bank requires a co-signer for you to get an auto loan. It means the bank sees as as over leveraged and a huge risk, which is why they require a co-signer. And you should see such as problematic too!  But instead off seeing this as a red flag, most people seem to think of it as just another hurdle to jump. I am bothered by that.

After all, a bank is in the business to make money, and the primary means of doing so is by lending you their money. But if they cut you off after 4-10 deals, they are doing so not for some strictly artificial reason, but because they see you as being in danger, and too risky to loan money too.

It would sound to me that if a bank cuts you off after a certain amount, then instead of going to loan sharks (read: "hard money" lenders), you should look at forming a legitimate corporation that takes out commercial loans and runs more like a legitimate financial institution.

Just some thoughts...

Picking stocks is definitely hard stuff.  Even the best of professionals guess wrong on a regular basis.  Personally speaking, I lean more towards a passive stock investment strategy and would consider myself something of a "Boglehead," looking to invest mostly in broad index funds and bonds.  I expose myself to other stuff for the sake of a natural curiosity and to gamble a little.  But at the end of the day, I'm convinced a chimp throwing darts at a board could pick stocks just as well as me or anybody else.  I know enough to know that there are so many unknown variables out there when it comes to investing in stocks that I've decided to just side with the very convincing and the strongly defended academic theories of guys like John Bogle, founder of Vanguard.

Real estate is still an area I'm trying to learn as much about as possible before making any long term commitments that impact my finances and lifestyle. With stocks, I feel like even if I lose everything, it should only take me down to $0. I don't have to worry about losing my home with stocks, and I can sleep well knowing such. REI on the other hand has the potential to put me and my family out on the street if things go really wrong.

@Joshua Woolls Perfectly said.  Thank you.  If I could give you more than 1 vote I would :-)  I think if I had my choice, I'd lean towards B as well when it comes to looking to get invested in Real Estate.  

It should be noted that what you have said also perfectly applies to investing in the stock market as well, where you can invest with margin, and see the same sort of growth or the same sort of set backs.  Of course, securing the initial and ongoing capital to invest in the market is a bit tricky (it usually requires being frugal and making an already healthy income), and you are exposed to the risk that the company you are invested in is the next Enron and could go to $0 tomorrow.  

But those stocks don't need a water heater replaced in the middle of winter, or a new roof, and require no additional capital from you to exist.  And if you go with a mutual fund, even the most overpaid mutual fund manager only takes 2-3%, compared to a property manager who wants 8-12%. 

Personally speaking, I want to have a diversified portfolio of assets that has exposure to a lot of different things.  Trading on margin or investing in real estate with leverage are both acceptable practices in my mind.  What the exact ratio that I could live with I'm still trying to figure out.

But doing what I have heard folks like Joshua Dorkin advocating on the podcast, where he puts 10% down, rehabs, rents, refinances and cashes out, then repeats the process, is certainly beyond my personal level of "risk tolerance."  Good for him if he can make it work consistently.  I know I could never personally sleep at night doing such a thing, and if it were my primary investment strategy.  Of course, I'm sure he's also getting an extra stream of income from this website, which further reduces his risk.  One really does need to be careful about putting all their eggs into one basket.  

Multiple streams of income and diversified asset allocations cannot consistently be beaten.  And that's a fact.   :-)

@Michael Worley I apologize, I misspoke.  You are right.  If you are putting money down on the properties you buy and those values hold equity, you do have a net worth.  For some reason when I wrote my original post I had my thinking turned around.  :-)

But if you aren't careful and you are overly leveraged (especially if you are using cash out refi's every couple years to use as the down payment on another property), it is easy to see that net worth destroyed by the sometimes wildly fluctuating local real estate market.  I know from my end, I've seen plenty of short-sale deals fluctuate by tens of thousands of dollars on the same property within just a couple of months simply because of some revised comps.

As far as owning something 100% instead of leveraging it, there is the peace of mind that comes with having little to no overhead.  If I own a $150,000 property out right and rent that same property for $1,200 a month, my cash on cash return on investment percentage might not be as impressive as if I were leveraged, but, I don't have to worry about sometimes wildly fluctuating local real estate values possibly leaving me upside down and destroying my net worth in the process.