21:56 PM, 8th October 2014, About 10 years ago 17
Leverage is a topic that I spend a great deal of time thinking about. In my humble opinion a lot of writers/’gurus’ that are incredibly well respected pay little attention to how much leverage one should take on. Of course the real answer to this question is very specific depending on ones individual circumstances but do any of the forum members use any basic heuristics?
A lot of literature talks about the power of leverage (we have all read the instead of buying a £100k house outright we buy x4 with a 25% deposit etc) primarily because a number of the gurus have done incredibly well from being turbo-leveraged at one point in time. Clearly this is down to personal preference and although I have what I would call a healthy risk appetite I like to be able to sleep at night performing a variety of ‘stress tests’ surrounding my property portfolio (voids, interest rates, boilers, losing my day job etc. etc). I have read Mark Alexander’s strategy a number of times where he talks about holding quite chunky amounts of cash in the bank which I think is very prudent and I run a similar strategy by utilizing my full ISA balance each year. I would hazard a guess that other landlords are not as prudent as Mark though.
In my head, I tend to consider my primary residence and my property portfolio and other assets consolidated under one balance sheet and I am very focused on total assets / equity (my personal leverage ratio) and my cashflow coverage ratio based on interest rates stress tested at 5-7%.
The hardest thing for me is considering adding properties to my portfolio, particularly at lower implied yields than the average of my portfolio given that my leverage ratio will naturally increase and my average gross yield on the portfolio will fall.
What are your thoughts?