Real Estate Investment: How Much Debt Is Too Much?

by Cheryl Pendenza - Realtor®/Broker Associate 10/23/2020




 Photo by Alexander Stein via Pixabay

Nearly all real estate investment includes some amount of debt. Debt on its own isn’t necessarily a problem but too much debt can create challenges. So, how much debt is too much? We’ll give you some solid answers below.

Quick note: If you’re already a seasoned pro, you probably don’t need our advice. This information is primarily for first-time investors, “at-home investors”, and those who are just getting started with real estate investment.

Industry Average Debt to Equity Ratios

Before you can determine what the right level of debt is for you as an individual real estate investor, it’s important to understand some industry averages. Investopedia reports that the average debt to equity ratio for businesses in the entire real estate sector is 352%, or 3.5 to 1.

This is high compared to the broader marketplace, because in real estate there are physical buildings involved. Lenders know that even if something goes wrong, they’ll still be able to recoup their losses.

The 352% figure reflects a range, of course: real estate investment trusts run higher, closer to 366%. Real estate management companies, on the other hand, come in much lower at 164%. Solo/part-time/novice real estate investors also usually come in lower.

Numbers Decoded

Unsure what these numbers mean? That’s OK; we can explain. The debt component is easy enough: that’s how much you owe on your mortgage or mortgages. Equity is, more or less, how much you own plus how much cash you have available. So, a 3.5-to-1 debt-to-equity ratio means that for every $100 in assets, you have $350 in debt.

Put that in terms of real estate numbers, and it means that if an investor holds $350,000 in mortgage debt, he or she should have $100,000 in equity. And that’s for investors that are comfortable with the industry average debt ratios.

The concept of debt to equity ratio is a tricky one. Want to know more? Here’s a deeper dive on understanding debt to equity ratios.

Good Advice for New and Small Investors

All that is just background for the real question: how much debt is too much for the new/small/solo real estate investor? The industry average is likely a little steep for people in this category. It would be easy to get overextended at that ratio, despite the security that physical real estate provides.

The exact right answer varies for every investor. One independent professional (in other words, he does this full time) seeks to keep his ratio at 300% and recommends others do the same. If real estate is a true investment for you (meaning you’re not dependent on the income for your immediate needs), then this is a good target. If you are depending on your real estate investing income, then we recommend keeping the figure lower — perhaps 200% to 250%.

Need help finding your next investment property? Reach out today!

About the Author
Author

Cheryl Pendenza - Realtor®/Broker Associate

Bringing more than 30 years of experience to the table, Cheryl has a paralegal degree, banking background, and is a member of many professional, civic, and community organizations.

Qualified • Experienced • Skilled

"As a full-time REALTOR®, I am dedicated to providing my clients with a high level of service by building relationships, marketing, and negotiating on their behalf. As a homeowner, I realize how important homeownership is.

Cheryl brings warmth and compassion to her client relationships and referrals have become the backbone of her business. "I’m grateful for every referral and welcome the opportunity to help clients achieve their real estate goals.”

Cheryl Pendenza, Broker Associate affiliated with RE/MAX Andrew Realty Services since 1999 is a local businesswoman and formidable negotiator who can help you achieve your real estate goals. Supporting family, community and local business is important to Cheryl and she can often be found at one of the local restaurants, shops, or galleries.