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I have started investing in Real Estate and want to grow. How do I do that?

 

Excellent question!  I am glad you are progressing and realizing your dreams of creating wealth and income through Real Estate. There is a very defined and very real answer to your question. The answer lies in your financial ratios. These ratios are not only very important to you personally, they are also very important to your banker.

 

Every investor reaches the point where they are ready to grow to the next level of performance and aren’t quite sure how to do that. They have been told that they can only own four properties and get financing or they have been told they can own only ten properties. They also fear that based on their W-2 income that they have exceeded the debt to income ratio that the banks will allow in order to lend them more money. We will answer all of these concerns.

The first ratio is the debt to income ratio. As defined by banks debt is the principle and interest portion of what you owe. It does not include taxes or insurance. They are considered operational expenses and accounted for separately. Income includes all income, not just W-2 income but rental income as well as other income from other investments like stocks, bonds or mutual funds for example. So, the first concern to address is that banks won’t allow you to exceed the debt to income ratio and still loan you money. As an investor you want to make sure that any rental property you acquire has a debt to income ratio of no more than 33%. This is my suggestion. Some banks will allow 36%, some will allow 40%, while other will allow 31%. For this discussion 33% is a good ratio. Obviously, you need to do due diligence on any property you buy in order to determine other expenses like taxes, insurance, water, repairs, etc. They certainly have their place in your decision making process. Getting back to the subject, your goal is then to only buy properties where your debt to income ratio is 33%. You can see now how, if you stick to this rule and your other income doesn’t decline you will always be able to have a favorable debt to income ratio and the banks will smile favorably upon you, right? Well, not quite. There is another ratio you need to manage.

The second ratio is the Asset and Liability ratio. Assets are of course the aggregate total of all that you own. In this case I would limit it to Real Estate. Liability is the aggregate total of what you owe. In this case I would include all that you owe money on, not just Real Estate, but all loans. In the case of assets and liabilities you should set the goal of owing not more than two thirds of what you own. So if you own one million dollars in Real Estate you should keep what you owe to $666,666.66. Now having said that I must qualify this. Historically, Real Estate is expected to be highly leveraged. In some areas and in times in history a 90% liability to asset ratio is acceptable. On average it has been about 80%. So why do I suggest 66%. The answer is that if you manage to this ratio and you also manage the debt to income ratio described above you will always be able to get financing and therefore you will always be able to grow your Real Estate portfolio. Further qualifying this I will tell you that when I was rapidly expanding my Real Estate portfolio I did borrow against 80% of many properties when acquiring them. However, I always had a plan to get the overall liability to asset ratio back to 66% with in a year. I did this by playing Red Light/Green Light. Remember this childhood game ? I would turn on the Green light, buy a few properties, then turn on the red light to get them up to peak performance thereby making them more valuable and in the process managing my ratios. By the way, banks will not limit what they loan you based on how many properties you own. You may not be able to get traditional residential mortgages after 10 properties but that won’t stop you because you can get commercial financing from the same banks for example.

 

My hope is that this will help you see more clearly your path to freedom by building wealth and income through Real Estate. If you are interested in learning more contact me. I would love to help you realize your dreams. Remember, education and information are not only necessary, they are vital to your making your dream a reality. Education and information will make you more competent and when you are more competent you will be more confident. When you are more confident you will be able to act with confidence. Education + Information + Action = Successful Results.

 

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