When are you too levered ?

[Nir]

QUOTE (JoefromTO @ Apr 27 2009, 12:17 PM) That`s what i understood as well. What he is saying is that the banks will loan 80% and you have to come up with 20%. That means they want you to have your own money tied up...so that you stand to lose something if you walked away from you house (speaking drastically). They know you won`t just walk away from 20%, which is what mitigates the risk for them lending you the remaining 80%.

So you can`t put down 20% and then get a line of credit on that same amount.

Here`s an example.

You purchase a property for $300,000.00 and put 20% down and the bank provides the rest. Let`s put that in numbers...

Price of property ============================ $300,000.00
Down payment =============== $300,000.00 x 20%= $60,000.00
Bank loan ==================$300,000.00 x 80%= $240,000.00

Lets say that after 5 years, you have paid down your debt agressively and have a balance of roughly $150,000.00

Now you want to put a line of credit on the property to access some of that equity to buy another investment property. So how much will the bank provide?

Ok, the way I understand it is this...Let say the property is now worth $350,000.00 after 5 years and this value is established by the bank when they do an appraisal of its current value. If the bank only lends up to 80% then here`s the amount of equity you can have access too...

Current appraised value=================================$350,000.00
80% of that==========================$350,000.00 x 80%= $280,000.00
Subtract debt ==================$280,000.00 - $150,000.00= $130,000.00

$130,000.00 is the amount of Line of credit the bank would allow you to access, thereby still having 20% of your own equity still tied up.

Correct me if I`m wrong, but that`s the way I understand it.

I don`t see how the fact that its your primary residence would have any relevance to this, unless the bank is willing to loan more than 80% to begin with.

Good examples. correct me if i am wrong but 80% is more likely if you have a job. if he achieve freedom by then and left your job, then it might be 65% as a non-employed/full time RE investor. meaning less money can be taken out as part of re-financing/re-qualifying. (well, depending on TDS and other formulas..)

 

[Thomas Beyer]

QUOTE (investmart @ Apr 27 2009, 12:17 PM) Hi Thomas, when you say "may be a problem in 5 years" you mean cash flow wise not renewal wise, right? Thanks.
no bank is forced to re-new .. but usually would . unless a sever drop in values is suspected or evidenced !

but yes, the MAIN issue is cash-flow ..

thus: a 25 year amortized 80% LTV mortgage gets paid down 10% to 72% LTV in a flat market .. so usually not a problem at 6% or even at 8% interest rate .. but a 95% levered mortgage over 35 years is down maybe to 92% of loan amount or higher (due to fees) and thus is a SUB-PRIME mortgage if rates are up to 6% or super sub-prime if 8% !!

Hence: allow for this possibility .. and go on not too levered .. and certainly amortize over 25 years or have very large cash reserves !!

 

[RogerPanchuk]

Thomas , Won`t Inflation help us pay for higher rates ?

If you think intrest rates will go up that much in 3 - 5 years, if or when this is happens we should see some significant inflation. Which should cause property values to increase aswell as rents ? I think you make very valuable point in this thread in regards to Ltv and shorter Am but won`t inflation help us pay for higher intrest.

I think that paying down the principle sooner or more quickly midigates alot of risk.

We intend to keep a close eye on intrest rates and lock in some of our variables at these low rates. Before the time that we are forced to pay higher rates we plan to sell off a few properties and paydown a few that we keep.Sure Hope we get back some of the equity that we have lost over the past year.

If we don`t see the inflation monster that lots are talking about, why would we see real high intrest rates?

Maybe this is wishfull thinking,but here is my thoughts on intrest rates
Alberta will do better and will see more of a recovery before the east dose, The feds will be waiting for things to be better out east before they raise rates much.
Our economy will be doing well and we will be still enjoying fantastic low rates.
Remember when Alberta`s economy was still rockin and intrest rates were on the way down ? I think the same will happen on the way out of all this. Alberta & Sask economies will start rolling along and Ontario & others will be lagging behind for a while and so will intrest rate`s ?

I remember Peter Kinch talking a while back about how the goverment decides wether to raise or lower rate`s. His story was if the GDP numbers in west said raise rates and the GDP numbers in the east said lower rates. The east would have more of an impact on what they did with the rates.

 

[JoefromTO]

QUOTE (RogerPanchuk @ Apr 27 2009, 11:53 PM) Thomas

If you think intrest rates will go up that much in 3 - 5 years, if or when this is happens we should see some significant inflation. Which should cause property values to increase aswell as rents ? I think you make very valuable point in this thread in regards to Ltv and shorter Am but won`t inflation help us pay for higher intrest.

I think that paying down the principle sooner or more quickly midigates alot of risk.

We intend to keep a close eye on intrest rates and lock in some of our variables at these low rates. Before the time that we are forced to pay higher rates we plan to sell off a few properties and paydown a few that we keep.Sure Hope we get back some of the equity that we have lost over the past year.

If we don`t see the inflation monster that lots are talking about, why would see real high intrest rates?

Maybe this is wishfull thinking,but here is my thoughts on intrest rates
Alberta will do better and will see more of a recovery before the east dose, The feds will be waiting for things to be better out east before they raise rates much.
Our economy will be doing well and we will be still enjoying fantastic low rates.
Remember when Alberta`s economy was still rockin and intrest rates were on the way down ? I think the same will happen on the way out of all this. Alberta & Sask economies will start rolling along and Ontario & others will be lagging behind for a while and so will intrest rate`s ?

I remember Peter Kinch talking a while back about how the goverment decides wether to raise or lower rate`s. His story was if the GDP numbers in west said raise rates and the GDP numbers in the east said lower rates. The east would have more of an impact on what they did with the rates.


Iv`e been too alot of the meetings, read alot of the forums and have tried to figure out what the "right" plan for me is. Leverage is a great way to accumulate wealth, provided its a reasonable amount of debt and is manageable. We all know that, but some like to push the envelop, trying to maximize every dollar. By playing with rates and mortgage terms, the numbers can change dramatically. Taking a 25 year mortgage and stretch it to 35 years is a great way to do that, but at what cost?

Debt pay down is something Iv`e worked on for the past 4+ years on the property I bought. At the time, I was still really new to investing. I had no mentors, no real life people to ask questions to. I wasn`t aware of REIN yet, or of Don Campbells books. So I did what I thought was best at the time. I put 25% down and got a conventional mortgage. Since my wife and I both have business`s and have a decent combined income, and no debt on our primary residence, we didn`t really need the income from our investment property, so we took the extra cashflow and paid down our debt.

Our mortgage is coming up for renewal now and I`m in a good position now because of what we did. The trade off is...we don`t have multiple properties. But my cashflow once the mortgage is renewed will improve on an already existing and healthy positive cashflow, while still paying down my debt.

After having this property for over 4 years and learning alot of what it means to be a landlord, I`m glad I did what I did. Iv`e since joined REIN and have aquired ALOT more knowledge and made alot of contacts. But one thing I have done is realized one thing about investing in real estate...everyone needs an anchor.

What I mean by anchor is that you need at least one property that is stable, producing cashflow for security reasons. That first property is your own bank, a forced savings bank account. If you put the money back towards the mortgage to reduce principle, or bank the money to use toward other investments, your anchor becomes the property that helps fuel others.

This is my perspective on real estate investing. I would love to have 20 doors today, but accept that it will come. I`m not educated enough about joint ventures yet, but will one day. In the meantime, my anchor continues to grow strong and stable.

So I agree with what Thomas says, about stress testing. Playing around with your investments today, so that they cashflow better today because you altered your payback strategy, could have a profound negative affect if your not carefull.

 

[ebolaman]

QUOTE (JoefromTO @ Apr 27 2009, 03:17 PM) That`s what i understood as well. What he is saying is that the banks will loan 80% and you have to come up with 20%. That means they want you to have your own money tied up...so that you stand to lose something if you walked away from you house (speaking drastically). They know you won`t just walk away from 20%, which is what mitigates the risk for them lending you the remaining 80%.

So you can`t put down 20% and then get a line of credit on that same amount.

Here`s an example.

You purchase a property for $300,000.00 and put 20% down and the bank provides the rest. Let`s put that in numbers...

Price of property ============================ $300,000.00
Down payment =============== $300,000.00 x 20%= $60,000.00
Bank loan ==================$300,000.00 x 80%= $240,000.00

Lets say that after 5 years, you have paid down your debt agressively and have a balance of roughly $150,000.00

Now you want to put a line of credit on the property to access some of that equity to buy another investment property. So how much will the bank provide?

Ok, the way I understand it is this...Let say the property is now worth $350,000.00 after 5 years and this value is established by the bank when they do an appraisal of its current value. If the bank only lends up to 80% then here`s the amount of equity you can have access too...

Current appraised value=================================$350,000.00
80% of that==========================$350,000.00 x 80%= $280,000.00
Subtract debt ==================$280,000.00 - $150,000.00= $130,000.00

$130,000.00 is the amount of Line of credit the bank would allow you to access, thereby still having 20% of your own equity still tied up.

Correct me if I`m wrong, but that`s the way I understand it.

I don`t see how the fact that its your primary residence would have any relevance to this, unless the bank is willing to loan more than 80% to begin with.


Ok I get it now. So basically even though I have 100,000 and make good money in the banks eyes I`m still broke!

 

[JoefromTO]

QUOTE (ebolaman @ Apr 28 2009, 02:00 PM) Ok I get it now. So basically even though I have 100,000 and make good money in the banks eyes I`m still broke!

Hehe...didn`t you say that you and your wife make about $150g combined? That`s far from broke

You have an opportunity to establish alot of wealth on your own, without joint ventures. If your putting $100,000.00 towards your primary residence, that should allow you to get a pretty decent rate. If you had that much to spend on an investment property and you want to put 25% down, you could get a nice $400,000.00 property, or 4 $100,000.00, all depending on where you live.

Actually, you need money for all the closing costs and the "sleep at night" fund, so it would be a little less.

You should be able to buy lots of property over the next 5-10 years at your income level and the great thing is, you can use the properties to offset your income...best ask your accountant to explain that one

 

[Nir]

QUOTE (thomasbeyer2000 @ Apr 27 2009, 06:29 PM) no bank is forced to re-new .. but usually would . unless a sever drop in values is suspected or evidenced !

but yes, the MAIN issue is cash-flow ..

thus: a 25 year amortized 80% LTV mortgage gets paid down 10% to 72% LTV in a flat market .. so usually not a problem at 6% or even at 8% interest rate .. but a 95% levered mortgage over 35 years is down maybe to 92% of loan amount or higher (due to fees) and thus is a SUB-PRIME mortgage if rates are up to 6% or super sub-prime if 8% !!

Hence: allow for this possibility .. and go on not too levered .. and certainly amortize over 25 years or have very large cash reserves !!

Hi Thomas, so basically correct me if I am wrong what you are saying is putting 20% is better than 10% down because it is less risky.
In other words what you are also saying is buy less Real Estate! I still prefer 10% on 20%. the reason is 1. the renewal is 99.99% NOT going to be an issue as discussed earlier/above and confirmed by a mortgage consultant! and 2. there is some cognitive dissonance to buying a property but not believing in it enough to want to buy as many such properties as possible. you have a point it is a bit less risky but I prefer based on the belief in EACH purchase to purchase as much such properties as possible hence put the minimum down required. (yes, banks do not easily allow putting 10% but when they do I`d still grab it!). just can`t do both: believe in my RE purchases and at the same time limit my purchases (buy less!) by voluntarily putting more down.

 

[Thomas Beyer]

QUOTE (investmart @ Apr 28 2009, 07:11 PM) Hi Thomas, so basically correct me if I am wrong what you are saying is putting 20% is better than 10% down because it is less risky.
In other words what you are also saying is buy less Real Estate! I still prefer 10% on 20%. the reason is 1. the renewal is 99.99% NOT going to be an issue as discussed earlier/above and confirmed by a mortgage consultant! and 2. there is some cognitive dissonance to buying a property but not believing in it enough to want to buy as many such properties as possible. you have a point it is a bit less risky but I prefer based on the belief in EACH purchase to purchase as much such properties as possible hence put the minimum down required. (yes, banks do not easily allow putting 10% but when they do I`d still grab it!). just can`t do both: believe in my RE purchases and at the same time limit my purchases (buy less!) by voluntarily putting more down.
if it cash flows @ 90% levered with a 6% or even an 8% mortgage .. why not ..

believing is good in real estate .. but FACTS are better !!

fact is that in 5 years interest rates will be higher ..

 

[Nir]

QUOTE (thomasbeyer2000 @ Apr 28 2009, 07:41 PM) if it cash flows @ 90% levered with a 6% or even an 8% mortgage .. why not ..

believing is good in real estate .. but FACTS are better !!

fact is that in 5 years interest rates will be higher ..


Yes. You provided good decision making criterias. it is in line with what I mentioned because
the properties I buy cash flow even with 8% mortgage interest, 10% down, 25 years!
(but not necessarily with 10% mortgage interest by the way).

Thanks.

 

[Thomas Beyer]

QUOTE (investmart @ Apr 29 2009, 11:07 AM) Yes. You provided good decision making criterias. it is in line with what I mentioned because
the properties I buy cash flow even with 8% mortgage interest, 10% down, 25 years!
(but not necessarily with 10% mortgage interest by the way).

Thanks.
then you are probably NOT too levered and are OK !!