You would have read in my previous post that years ago we decided to lay out our wealth creation plan and part of that strategy is the make it keep it rule I created – the MIKI.

We worked out that we needed 200 properties in our portfolio to create the income we desired. This also meant 200 tenants and 200 maintenance issues to meet our financial goal. The tenant issue wasn’t the only concern; with 200 properties comes a lot of risk and we knew that our passive income could very easily be eroded by maintenance issues such as a broken stove; or an air conditioner on the blink' or if we needed to repair a kitchen or a bathroom or paint the inside of the house.

Another big risk is the debt associated with 200 properties. Let's just say initially that we bought those 200 houses at $100,000 each, and we mortgaged them at 80 percent. So 200 houses at 100K at 80 percent, that's going to be a $20,000,000 portfolio. A 20-million-dollar portfolio sounds great but in this example we've also got 80 percent of it mortgaged. So that's $16 million worth of debt.

I don't know about you, but who wants $16 million worth of debt?  We certainly don't.  And the reality is that that leaves $4 million worth of equity, which is at the mercy of the market.

Debt is a double edged sword.

It’s a fantastic leverage tool to allow you to grow your portfolio but if the market turns and you don’t have a plan B, that debt can hang your entire portfolio. Let’s say that the market dropped; suddenly your 200 houses are not worth 20 million anymore, they're worth 18 million.

It's highly likely the bank could reassess your loans and say, “We want you to lower your mortgage to 80 percent of the current worth of 18 million.” All of a sudden you need to top up your mortgage to keep it at an 80 percent loan to valuation ratio and that can hurt. 

In this example, that top up, by the way, is $1.6 million.  (GASP)  Take into consideration that you could sell off a few properties (hopefully they've gone up in value), but you still have to keep the whole thing geared at 80% … well, let's not even go into that mess.

That’s when we really got clear on what we needed to do. There is an alternative and I will tell you about in my next post…..