Debt Management ? How do you handle Debt ?
Almost every business has debt. Obviously your income should exceed the operating expenses and the debt, leaving a positive cash flow. It doesn’t matter whether you have $10,000 in debt or $10 Billion dollars of debt, the story is still the same.
Is that what you were asking?
Mike
Hi Mike,
Thats what I’m asking to a certain extent but how does one keep there debt low and still have the ability to acquire lots of properties ? How does one build up these massive holdings ? They must take on debt …
BSM,
Investing is all about balances. Debt to asset and debt to cash flow ratios and what you are both comfortable with and what can be truly sustained through your business. Debt allows faster forward motion in your business, but most people get too greedy and want what they want too fast, so they use more and more leverage until they eventually make a bad decision, and the leverage brings down the whole house of cards.
If you want to keep debt low and aquire a lot of properties, you are going to have to work your tail off to make a lot of money. (80 hr weeks), live on a small portion of that, and plow the rest into property, until such time as you get into large enough projects that the debt can be set up to only be against the property in the project and not against you personally.
My 2 cents,
DB
BSM,
I think that you perceive debt as something negative. I don’t agree with that premise. In fact, being able to acquire debt is a good and necessary thing if you want to grow a rental property business. Obviously, you MUST have a plan that ensures your business will be able to service the debt and still generate the desired profit. If you buy the properties right, you will also be building a lot of equity and cash flow.
Mike
BSM,I think that you perceive debt as something negative. I don’t agree with that premise. In fact, being able to acquire debt is a good and necessary thing if you want to grow a rental property business. Obviously, you MUST have a plan that ensures your business will be able to service the debt and still generate the desired profit. If you buy the properties right, you will also be building a lot of equity and cash flow.
Mike
Mike,
Do you think most “major” landlords pay off there properties as soon as possible ? with the profits they make from them ?
These landlords that have thousands of units, in your opinion or anyone elses, how do you think its done ? with massive debt ? or very little ?
BSM,
I would say that most big landlords have “massive” debt, in absolute numbers at least. Most successful entrepreneurs are driven to keep growing and that is done with the leverage of using someone else’s money. This money can be from the bank or other private investors, but I doubt if you could find many big players in real estate who have no debt.
Mike
BSM,
I think that there is a difference when you move from an investor that has 10 units to one who has thousands. The 10 unit investor is likely to have a personal guarantee on the mortgages and be in “massive” debt. The investor that has thousands of units is more likely buying large apartment complexes that are owned and mortgaged inside an LLC or similar entity structure. Therefore there is no debt liability coming out to them. In other words, if the company goes under, it does not necessarily take down the principles of the company.
I see that your question is how do “you” handle debt, and I just gave you advice on you instead of telling you about me, so here is what I am doing. First, as per my post above, I have a business that I work my tail off in. It is becoming more successful (I have been in it for 14 yrs now ) and we are paying down debt and cash flow is starting to grow. Instead of living higher, I am now looking to invest this surplus. As of right now, we are being careful in the area of debt because we are still learning so much about this. I am determined not to jeapordize the business with bad investments. To this end I am only taking on projects that I know I can survive and feed if I have to in the worst case secario, or projects that can be mortgaged inside an LLC without personal liability to debt. An example is a large apartment complex that we put money into along with others. It required a lot of money in the company to put down, but when it was done, the company had a loan for about 12 Million, that is completely secured by the property. The most that we can loose is the money that we put into the project. They can’t come back at us for any losses that the company has in a “fire sale”.
Hope this helps,
DB
BSM,
Positive leverage by it’s definition is increasing your yield above what it would be without debt (all cash). Of course big investors have massive debt, that’s the reason they became big investors! Forget about the actual dollars you make (cash flow) and focus on the yield of your investment. If you own the property free and clear, you’ll be lucky to yield 10-20%. Your monthly income might be so much that even your impressed, but you’d have so much more if you had positive leverage. If you had a property with a CLTV of 75%, you could be yielding 80-100+% of your investment. If you have 10 million dollars to invest, it would be unwise to buy a 10 million dollar building outright. It might be better to split the money up and leverage it into buying (5) 10 million dollar buildings. You could also leverage it into buying a 25, 50 or 100 million dollar building.
All big investors (rich enough to own a calculator) know that positive leverage= higher yield= more money. Publicly and privately traded REITs do it, large private investors do it, large private equity groups do it.
Real estate is no better than any other investment except for debt. When you buy a house for $100,000 house and pay cash and it goes up to $110,000 in value, you make $10% on your money. When you only put in $10,000 and finance the rest on that same $100,000 house and it goes up in value to $110,000 the house still made a 10% gain but your cash saw a return of 100%. That is the beauty of debt. Also my $100,000 can get me 10 houses with $10,000 down each instead of paying cash I can only get 1.
Now how do I manage my debt?
Remember that late payments are the bane of credit, so I make sure I have no late payments…ever. What I do with my personal debt is that I have all my bills (everything I owe anybody) on automatic payments for the minimum. That way if I am on my luxury yacht or drunk in the gutter, my bills always show paid on time. I then go in and pay on-line any extra I want to pay any particular creditor. But that keeps my feeble mind from forgetting and making a late payment.
My properties are paid by me manually right now. I just want to manage when rents are received and when payments go out. I have a few thousand in my company account to float lates but I pay them myself.