Epic Real Estate Investing - How to Prevent Over-Leveraging | 1142

Episode Date: April 27, 2021

Have you ever asked yourself what to do when you exhaust all of your capital on buying rentals? If this is your situation, you don’t want to miss today’s episode! Specifically, Mercedes recently received a phone call from a podcast listener asking this particular question. Tune in and find out what advice the Turnkey Girl gave to the gentleman while preventing his investing from over-leveraging! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. So you want to be a real estate investor, but you don't want to do the work. If there were only a way where someone else could do it for you, now there is. Tune in here each and every Tuesday on the Epic Real Estate Investing Show for Turnkey Tuesdays with your host, Mercedes-Tores. Hello and welcome, welcome to Turnkey Tuesdays brought to you by Epic Real Estate Investing, My name is Mercedes Torres, your turnkey girl, and I am lucky enough to be partners in crime with Mr. Matt Terrio, the guy who created the epic real estate empire.

I help busy professionals create passive income through real estate investing so they don't have to work so hard and maybe even retire sooner. So I created this show to share tips, advice, and real life, real estate experiences so that you too can create passive income in your world. If this is your first time here, glad you made it. Make yourself at home. If this is not your first time here, welcome back. So, as I've shared many times before, I do this show to bring you real life, real estate experiences so that hopefully my sharing makes a difference for you in your real estate investing endeavor. And this is the reason that I do interviews or I share actual experiences of my personal real estate portfolio.

And I often share questions that I get from listeners and students and conversations that I have with clients that just call in. And today, I'm going to share an interesting conversation that I had with a gentleman that called my office about a week ago. And he called asking, what happens when you've exhausted all of your capital on buying rentals, he said? Like, how do you get more money to buy more rentals aside from working and saving? Like, how do you multiply faster was his question? And I actually get that question quite often. Now, I'm not sure if this was the core premise of why he was reaching out. In fact, the gentleman that called me is not even my client.

I've never talked to him before. I had never served him before. He's a podcast listener. And in fact, he is a client and a follower of bigger pockets, a great group of guys that put out awesome information and great content. And they also have their own platform. And in fact, he even purchased a property through their turnkey provider. So a shout out to the gentleman that reached out to me, Mr. Lou T from

Lakewood, Florida. Lou shared with me that he has purchased seven rentals through different means and through a turnkey provider. Now, Lou is self-employed. He owns his own business, servicing pools, I believe it is. And we talked for a while. In fact, when he called me, the call that I had after his call that was scheduled after his call had canceled. So we ended up talking for almost an hour. And he mentioned that, you know, he saves money to buy properties, but he did exhaust all of the capital that he had in buying the seven rentals. So then I just common sense had me ask him, why don't you turn those rentals? that you own personally into a portfolio loan and then borrow against it. He asked me, well, how do you do that? So I explained it and I'm going to explain it to you because it's very, very doable and it's quite easy.

So here's what happens and here's what Lou has done. Lou has purchased seven properties using all conventional financing. and in today's world, if you can qualify for conventional financing, that is a Fannie Mae loan or a Freddie Mac loan that is backed by the government. If you can qualify for those, they are phenomenal loans at the moment. Freddie and Fannie allows you to purchase up to 10 properties using only 20% down. Now, at the moment, rates are pretty low, and you can do up to 10 properties, including your primary residence. That's it.

If you qualify, I would absolutely tell you to take advantage of conventional loans. So, having said that, Lou has purchased seven properties using Freddie and Fannie products, meaning he could probably purchase two others because I believe he owns his primary residence. But if Lou were to take these properties that he owns personally and creates a structure, an LLC, that he can take these properties that he personally owns and does a cash out refinance out of his personal name into this portfolio. So now he can borrow against the portfolio. he is able to take everything out of his personal name and put these properties into a portfolio loan. The portfolio loan would inevitably cash flow,

but what it would allow him to do is he may be able to borrow against the cash flow of his portfolio. The difference between a conventional loan for one property and the difference between a portfolio loan with multiple properties is when you're buying personally, the property is purchased under your name and individually the property is based and valued at the appraised value. However, when you do a portfolio loan, the portfolio loan is based off of the projected income of the property. So many times you're able to put all seven properties in this case into one loan and then you're able to borrow against the projected income. And in many cases, you are able to borrow this money and then because you've taken the loans out of your personal name and are now in a portfolio, now you personally don't know, you don't own anything in your personal name.

So what that does is it allows you to take the funds from your portfolio loan, doing a cash out refinance, and then reinvesting it into more properties that now you can buy individually. So then Lou asked me, well, what if I keep borrowing? Don't I become over leveraged? Great question. And my response was, well, it depends. because you only become over-leverage when your numbers don't pencil out. When you have to come out-of-pocket on your investments, that's when you become over-leveraged. So as long as you buy right and you can cash flow with a paying tenant, then there's no way you can go wrong even if you're forced to drop the rents.

Now, we just experienced a heck of a year. 2020 was unprecedented times, and many people were out of jobs and were not able to pay their rent. And imagine, if you had to drop your rent to make just the minimum payment of your mortgage. Now, let me explain that a little bit more in detail. And I'm going to use one of Luz's properties as an example. sample. So Lou shared with me that he had purchased a property with a turnkey provider that's going to remain lameless. I'm not in the business of slamming other companies, but needless to say, this provider didn't necessarily have his best interest in mind. He bought a single family residence

for $160,000. This property rents for $1,250 a month. Now, already that criteria doesn't work for me because the property is nowhere near the 1% rule, but that's beside the point. We already know that the value of the property came in at $160,000. It rents for $1,250 a month. So I asked Lou, what is your mortgage? mortgage payment, your taxes and insurance. So PITI stands for principal interest taxes and insurance

was roughly about $700 a month. The management fee, he said, was 8% of the rents collected roughly about $100 per month. So the debt service on this property was $800 a month. This is not factoring in vacancy or maintenance because I'm just using the core figures that are a constant every month. Now, yes, you do want to factor in maintenance and vacancies when you're buying an investment property, but the reality is these instances of maintenance and vacancies, they don't occur on a monthly basis. At least, I hope they don't occur for you on a monthly basis. So, we just experienced this national pandemic and some tenants legitimately could not pay their rent because they lost their job and Luz tenants did not pay rent for almost a year. Now there was an eviction

moratorium and Luz property management didn't work with the tenant. The tenant did not pay rent for a whole year. And Lou told me that they were recently evicted. But during the time that he was not collecting rent, Lou had to suck it up. He had to make the mortgage payment out of his own pocket. Now, luckily, Lou has six other properties that he's depending on, and he's a business owner that's doing well. So he didn't really feel it.

But that's not necessarily. a good thing. This is not what happened in my world because what my property management teams did with our clients is we reached out to the clients and we took an extremely proactive role. So what we did is we talked to all of the tenants that said that they could not pay rents. And I had each one of our investors, including myself, look at the mortgage payment, the taxes, and the insurance that each one of these properties had. And I just calculated everything and did that across the board not only to my properties, but I had my investors do the same. Then we looked at the tenant that wasn't paying rent or the tenant that said, I can't pay rent, I lost my job. we have a financial situation, whatever the case may be.

When a tenant comes to you, you want to say, what could you pay? Whatever the figure that they came up with, I would see if the tenant could at least cover the payment of the principal interest, taxes, and insurance. Now, during this pandemic, we had less than 2% of our tenants say that they could not pay rent. So we offered to temporarily drop the rents to at least meet the minimum debt service of this property. And our tenants were beyond grateful. And this, my friend, is how you avoid becoming over-leverage. I often say that real estate investing, it's a numbers game. It's all about the numbers. And if you dial in your core numbers, despite the fact that you may have two loans or 25 loans, numbers do not lie. Here are my three ingredients for not becoming over leverage. My secret sauce, if you will. Number one, when you buy a rental,

property, make sure it cash flows. Critical. Number two, in the event that your tenant cannot pay rent, ask them, what can you pay? And number three, whatever figure your tenant says they can pay, make sure it at least covers your principal, interest, taxes, and insurance. Always remember that the key to creating wealth is leveraging as much as possible without over-leveraging yourself. And you can avoid becoming over-leverage if you get your tenants to pay the bare minimums of your principal, interest, taxes, and insurance. That's it for today, my friend. I truly hope you found this episode helpful.

and if you'd like to connect, feel free to reach out to us. Go to cashflowsavvy.com, download the frustrated investors guide to passive income, or hit the contact me and we will connect. Until next week, on Turnkey Tuesday, where cash flow is keen. Do you have doubts about your current plan for retirement actually panning out? Imagine revolutionizing your retirement plan so it pays you right now, and in retirement. Change one thing, one time, and that revolution can be yours.

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