I met
a man at the bank I was working at in 2010 in Ohio. His story helped me realize that smart and
calculated growth is critical in the real estate business and the dramatic
affect that over leveraging can have on your business. It’s easy to understand why you should take
your cues from one of these investors and not the other.
He
was just over 50 years old and had some questions on life insurance.
We sat down to discuss his accounts, balances,
and what he was looking for. We went over his checking account which was his
only account at my bank. It had a little more than $500,000 in it. As I collected
a profile on him of what he wants from his accounts he mentioned his
Real-Estate holdings. I listened closely and let him talk.
He has $10M in RE across two different states.
He owns vacation rentals in FL. Residential and college rentals in OH. He has
about 60% equity. He said he started buying in his early 20s.
I asked him more about how he runs it. He
doesn’t over leverage and he tries to buy a few units a year and always have
depreciation and tax write offs.
His net worth consists of real estate and his
checking account. That’s it. He keeps a high balance in his checking and uses
it for day to day purchases and expenses. He keeps it very simple. With his
500k in his checking that’s 5% of his RE value.
I asked him more about his debt to equity when
he told me about his friend in Florida.
His friend started around the same time he did
in his early 20s and he turned his real estate into an empire. His properties
were worth over $100M he said. Then during the 08-09 downturn he lost the
majority of it do to being over leveraged.
Now he’s scrambling to hold on to what he still
has. He’s been foreclosed on multiple times and it’s completely destroyed his
credit and business.
He ended by saying that’s why I make sure to put
a good amount down on all my properties.
We
didn’t end up doing any life insurance deals together but the story of his
friend with 9 figure real estate portfolio, and how he deals with leverage and
cash stuck with me. Now that I’m invested heavily in that business I completely
understand why it is deadly to over-leverage; and the importance of a cash
reserve.