A while back I wrote an article called "Cash vs. Mortgage, and a Scenario." There I explain a few key differences between paying cash for investment properties, or mortgaging them. Today I reviewed my real-estate portfolio and was in shock about how much risk I am really taking on. I want to provide insight for my viewers to see some real-life examples and to further motivate me to pay my debts off!
I went into my investment properties with nothing down, since I really had nothing to give. This leverage allowed me to take on long-term debt without using any short term cash. Having three properties in the portfolio provides 8 renting possibilities. Assuming no property destruction and no tax benefits, here are the 8 outcomes:
As you can see above, vacancies result in serious financial consequences. To help minimized risk, I have tenants sign 1-year leases which are staggered so the possibility of multiple vacancies is reduced. But still, things still can happen that can put me in a bind. Over the years I have established a hefty emergency real-estate fund for tough times ahead (though this could be easily wiped out should multiple vacancies occur over extended periods of time).
Having real-estate debt has always put a damper on my dividend investing contributions. I often opt to pay additional cash onto the principal over purchasing a good-valued dividend stock. This results in less long-term debt and risk. If I manage to pay off the properties, here is how the 8 outcomes would look like:
After reviewing the chart, the risk here is almost non-existent. All 3 properties would need to be vacant in order to have a negative cashflow! If this was the case for me every month I would have a much easier time getting additional properties or helping the dividend-investing portfolio.
It is important to note; that when vacancies occur there are always repairs that need to be done (or house cleaning). This is usually a minimum of $150 if you have a professional involved. Insurance and taxes have been included in the scenarios above, making the data easier to digest.
Disclaimer: I am not a financial planner, advisor, or accountant. The financial
actions mentioned were only suited for my own risk tolerance, strategy,
Copying another's financial moves can lead to large losses. Each
person needs to do their due diligence in researching and planning their
own actions in the financial markets.