In the second episode of The Profitable Rental Podcast we continue our conversation with Sharon Lechter and Brandon Hall for more real estate investing tips.
In this episode of the Profitable Rental Podcast, we discuss practical advice for managing real estate finances and scaling your rental portfolio. This episode is the second part of our two-part special (watch part one here) featuring Sharon Lechter, a seasoned real estate investor, author, and financial literacy expert, and Brandon Hall, a CPA specializing in real estate tax.
One of the overarching themes of this two-part special was the importance of understanding your financials and staying on top of your numbers. Lechter and Hall share their insights on loan-to-value ratio, cash flow versus appreciation, critical numbers to monitor, and the significance of individual risk tolerance.
Sharon Lechter shared her experience with a commercial property that faced challenges due to the loan-to-value (LTV) ratio. She emphasized the importance of being aware of the LTV provision in your mortgage agreement, as it can have significant implications on your investment. "You need to be aware of it. I have a dear friend who almost got thrown out of bankruptcy. She never missed a payment, but she had a problem with loan-to-value on the property," says Lechter.
Understanding the loan-to-value ratio is crucial because it measures the risk associated with your real estate investment. The LTV ratio determines the percentage of the property's value that is financed through debt. A higher LTV ratio means a higher level of leverage, which can amplify both gains and losses.
Lechter's anecdote serves as a cautionary tale, highlighting the need to carefully evaluate the LTV ratio and its potential impact on your financial stability. As she further explains, "You can get away with it when the market is good, but when the market turns, it can be challenging. It's a risk."
Scaling a real estate portfolio requires careful consideration Hall points out and will depend not just on risk tolerance, Hall points out, but financial capacity, and investment objectives. While some investors may choose to “leverage to the teeth,” he explains, this opens them up to a higher risk profile and should something unexpected happen it could leave you in deep water. As such, many investors may prefer a slow and steady approach, focusing on conservative assets with reliable cash flow.
Brandon Hall highlights that every investor has a different level of risk tolerance, and the speed of portfolio growth should align with their comfort level. "Everyone has a different level of risk they're willing to take on, so how fast you grow your portfolio is really down to what you're comfortable with," states Hall.
By aligning the pace of portfolio expansion with individual risk tolerance, investors can build a sustainable and profitable real estate portfolio that suits their unique preferences and financial circumstances. Lechter agreed saying, "There's good debt and there's bad debt and Lechter said, should “add momentum to your money."
The discussion then moved to the perennial debate of cash flow versus appreciation. Brandon Hall pointed out that striking a balance between cash flow and appreciation is crucial for long-term success. Cash flow provides regular income, ensuring that your investment is self-sustaining and can cover expenses such as mortgage payments, property management fees, and maintenance costs.
Appreciation can allow you to realize huge gains, but you’ve got to wait for them Sharon Lecheter explained. “Cash flow,” on the other hand, “is what allows you to build your personal wealth and maintain and increase your style of living,” so there are reasons to focus on both. “Real estate is the greatest leverage on earth,” but "you want to make sure that you're taking advantage of leverage in the right way so that you're constantly increasing your equity position."
The real estate market is dynamic and can be influenced by various factors such as economic conditions, population growth, job opportunities, and infrastructure development. Conducting thorough market research enables investors to identify emerging trends and lucrative opportunities.
"It's really important to understand conditions of the property, the monthly cash flow, the numbers, but also conditions of the market, so that you are looking at every aspect that's going to impact the future appreciation as well as the current cash flow," advises Lechter. Being aware of the market trends and potential for growth is crucial in making informed investment decisions.
By understanding market conditions, investors can strategically position themselves to take advantage of favorable conditions and maximize their returns on investment. For example, Sharon adds, "If you're in an area where there's major infrastructure development coming in, that's going to change the dynamics of that particular area."
Success in real estate often involves stepping outside one's comfort zone and seizing opportunities that align with long-term goals. Whether it's venturing into a new market, exploring different property types, or adopting innovative investment strategies, taking calculated risks can lead to substantial rewards.
Both Sharon and Brandon encourage aspiring investors to make bold choices and take action today to achieve their desired results. "If you want something different, something better, start making different choices today." Lechter's advice reflects the significance of being proactive and willing to explore new opportunities.
Brandon Hall added to this, explaining that you have to be willing to work to make your investments profitable. He's constantly checking his “cash flow compared to the total equity and watching it changes every single year.” Because you have to be watching for new opportunities. “Is there a different place to park that equity or is it good to continue leaving it in this property?” he asks.
Both Hall and Lechter’s advice serves as a reminder that a proactive mindset and a willingness to embrace change are essential for achieving financial success and growth in the real estate industry.
You can get more real estate investing tips in our article detailing part 1 of the interview with Brandon Hall and Sharon Lechter →
In this enlightening episode of the Profitable Rental Podcast, Sharon Lechter and Brandon Hall provide invaluable insights for real estate investors. They stress the importance of being mindful of loan-to-value ratios, understanding the relationship between cash flow and appreciation, and considering market conditions for future growth.
Both experts encourage investors to make bold choices and tailor their portfolio growth according to their risk tolerance. By incorporating their advice, real estate investors can build a profitable and scalable rental portfolio while navigating the ever-changing dynamics of the real estate market.