Page 173 - Trump University Commercial Real Estate 101

Take Onl y Intelligent Risks

can about where they locate their properties. Nothing is accidental
with them.

When Good Debt Turns into Bad

Turn on your TV late at night and you ’ ll hear another no - money - down
pitch for real estate investing. I ’ ve already explained that although
most of these deals are not good, it is possible to invest in good prop-
erties with no money of your own down . In other words, they are regular
deals that require down payments, but you get a lender to put up the
down payment.
I discuss financing in more depth in the next chapter, but I want to

make a point about risk here: Just because you can arrange lots of debt
on a deal does not mean that you necessarily should .

Debt has a way of eating up cash flow, and the danger arises when

your deal is thin on cash flow to begin with. When those funds must
go to debt service, you ’ re taking a big risk.

Think of cash flow after debt service as your safety net. That ’ s the
amount of excess dollars that ideally go into your pocket, but could be
used for the property. For instance, if the property needs additional

repairs or occupancy temporarily dips, having that cash flow is a great
way to smooth out the ups and downs.
When you have a deal that works on paper with lots of debt and

very little cash flow, it starts to look a lot like the pro forma deals
I mentioned earlier. You had better be exactly right in your projections,
or bad things will quickly begin to happen to your investment.
Remember the debt coverage ratio :

Net Operating Income

Debt Coverage Ratio ____________________

Debt Service
Regardless of the amount of debt you can arrange, shoot to have a
debt coverage ratio of 1.25 or higher. That will ensure that you have
adequate cash flow to cover your operating expenses and debt service.

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