Ways To Lose Money In Real Estate #6 (Over-leverage)
Excessive debt and over-leveraging can quickly get you into trouble in real estate investing.
See other videos in the series here.[Video Transcript]
Hey all, Zach McDonald, your real estate agent with Real Property Associates, and we’re continuing the conversation on how to lose money in real estate. In this video, I want to talk about overextending yourself. What we’re essentially talking about is the financing aspect of it. We can talk about the personal financing piece of it as well, but there are multiple ways you can overextend yourself. So I see homebuyers that push their budget. They can barely make it work and then make a home purchase. It’s great if it works out and they get a, you know, a pay raise down the road. Or maybe the spouse or partner starts working, and maybe they weren’t working before, and you have increased income. Assuming everything stays the same, that’s great.
What happens is when … These are conversations that are just real that I have with people. Maybe a married couple or, you know, maybe you’re just living together. Maybe you start talking about having kids and a family and what that looks like. For some people that means you have daycare expenses, which also impacts your budget. In other cases you have a spouse that stays home. Whether that’s the husband or wife, or the man or the woman in the relationship, you have people that are not working and so you’re losing income. So you’re either … You know, you have people losing income or maybe they have a babysitter. But there’s other expenses when you have kids, or add kids into the mix.
So one of those real conversations people have are, “Okay, well, let’s make sure we can qualify off at least one of these incomes,” whichever income is planning to be around. Because if you get in a spot where now you don’t have enough income to support the purchase, you know, the mortgage … Excuse me there. If you don’t have enough income to support the mortgage, now you’re in a tough situation. We were talking about selling too soon in one of the other videos. If you get yourself in a spot where you’ve overextended yourself financially … Maybe you don’t have any emergency fund or extra savings set aside for a rainy day, and a rainy day comes. Or maybe your family situation changes and now you have somebody not working. Or maybe somebody gets sick or hurt or disabled. God forbid, those are terrible things, but maybe you only have one income to live off of. Now you need to make this mortgage payment, and you have to … Maybe you can’t.
So then you’re getting yourself in a situation where you need to sell. When you need to sell, that’s not really the position you want to be in, specifically if you’re in an area or in a market that has depressed home values. Because if you bought at a higher price, and you sell for a lower price, you’re losing money in real estate. So that’s one of the situations that I see that’s problematic. Sadly it does happen to people. It does happen to people. I see it a lot. Now I try to have these conversations with clients up front so it’s not my clients necessarily having these issues. But I don’t pretend to think that I’m not going to get a call here one of these days that says, “Hey, Zach, we need to sell.” It’s going to be a less than pleasant conversation about the reality of that.
The other aspect, you know, if you get overextended … You can get overextended with your financing. So some people do home equity lines of credit, and they borrow money on their house and then put that money elsewhere. Then they have two loans on their house instead of one loan. I’ve seen this in my own family, where people have gotten overextended financially, where they borrowed more money than what the house was worth at the time. Then they needed to sell the house and do a short sale essentially, but they had to sell the house for less than it was worth. Now they’ve got multiple creditors that want that money, and they’re … It’s a mess.
That same situation can happen. Maybe you are a real estate investor, and it’s a pretty common thing to do where you borrow equity and you kind of transfer it to the next property. You take money out of one house to buy the next one, to then buy the next one. It’s a debt leverage strategy, which there is some practical benefits to that, but there’s also a lot more risk. So the more debt you have, the more risk you have. If you can’t rent out one of your properties, or if the market changes and you’re not able to make all these payments, now you’re selling off your properties. You’re selling them off for less, and you’re losing money in real estate. You could potentially be losing all your houses.
You hear these stories, or at least I hear these stories. Sometimes it’s somebody that’s lost and learned and then done it again a different way. But I see it all the time where people are just leveraging, leveraging, leveraging, leveraging. So be cautious that you don’t overleverage yourself, because then you get yourself in a risky position where you might have to sell sooner than you’d like or sell for less than what you bought it for. So the word here is to be cautious with overextending yourself. Whether that’s your personal budget or that’s your financing.
Thanks so much for watching this series, Ways To Lose Money In Real Estate. If you find this content valuable, please consider liking and subscribing to my YouTube channel. And if you want to see other videos like this, please go over to my page and check out the playlist Ways To Lose Money In Real Estate.