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How to Use Debt to Mitigate Risk

With Percy Nikora, Co-Founder

So in purchasing these large multi-family assets, we do use debt. Debt is actually a it's a tool. It's a powerful tool. But it has the two sides of it. So if it's used wisely, it's it definitely helps you multiply or your returns. So in the end, most of our deals. We use leverage or debt. But we tried to be relatively conservative in the what's known as the loan to value ratio. So, you know, multi-family can range anywhere from 70 percent to 80 percent.

And what that means is the whatever the value of the product is today. The asset is today. We don't take 100 percent of the debt. We only go up to about 70, 75 percent. So that gives us a fair amount of cushion. So if the market were to order to soften, we could still just hold the property. And right through that downturn, because the income coming in through the rents will still be a lot higher than our debt service. So what we need to pay to the bank. So, you know, we maintain a good ratio where we're operating. Our income is above what we owe the bank or any of minus our expenses.

So that's how we sort of hedge the markets a little bit as well. Make sure that if we had to ride out a downturn in the market, we're able to do that. The other thing we do is we try to also make it try to build in some extensions. So we negotiate a certain amount of interest only period upfront. And then we have generally, too, to one year extension. So if we needed to, our business plan generally says, OK, we're going to invest in this deal.

We're going to update it. We've got a bridge loan for that and then we refinance to a more permanent agency type loan. But for some reason, if the market softens during that timeframe, we have these built-In extensions so we can exercise those and automatically get a couple additional years out of it, thereby extending the runway.

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