Hello, amazing community!! So I have a question and I want the most blunt response, when starting out with investments how do I look at debt? I have started getting into business credit and I've been told when getting funds for any investment don't be scared of the debt, that all business owners have debt, and" the richest people are in debt" well as crazy as it initially sounded to me I've pondered on what to take from it. I honestly thought about the USA and how we have this great economy overall in history yet have just about the hugest debt as well right? So are the richest people in debt? I've warped my cerebrum trying to grasp the logic so how does it work for you guys? Has anyone started on just loans and if so would you mind sharing which kinds of loans and were they business loans? Leaping into this so excited to learn new things I have become consumed by questions I just enjoy seeing it from other perspectives if anybody has time to share theirs Im beyond thrilled to read.
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Debt is a slippery slope and a sliding scale. Use it to scale into a healthy, appropriately managed portfolio and reduce from there. This could mean 5 properties for you or 15. But do an appropriate amount to get yourself wealthy, then start understanding the underlying risks of debt and do your best to get rid of it.
Don't leverage yourself too quickly or inappropriately. Always keep enough cash in the bank to cover yourself, family, and investments for a manageable amount of time without NEEDING to sell anything.
My recommendation for folks that have regular W2s is to get into the 3-5 house, so smaller ish portfolio, with more quality than quantity locations. Ride it for 2-4 years, then add 1-2 houses in that portfolio no more in that mean time. Go for quality again, over quantity. Start angling to which you 1-2 believe in 5-10 years(I know this is a hard part) will yield the best return versus hold. So not your very best house, or worst, but likely you're middle one or 2nd best one. Start trying to recast, not refi, the other properties besides these two, and in 5-10 years sell 1 or 2 properties pay down as much as debt as you can with that. You'll have 3-5 properties with significantly less debt or no debt, that's something 99% of the world wishes to achieve.
Rental Property Investor · St. Louis, MO · Member since 2022 · 125 posts · 124 votes
3y
Depends on the type of debt. Consumer debt should make you feel anxious to pay it off. Debt that is making you income while someone else is paying it down should make you smile and want to do it more. Leveraging other people's money and paying minimal taxes is how the rich get richer. To answer your question about what kind of loans, I started my real estate investing with a hard money loan to do a flip. Would not recommend doing that as your first investment. Then I got a HELOC on my primary residence and focused on buying rentals. Best of luck with your investment journey!
The way you word it is actually perfect and just wiped some smudge from the view I've had on money altogether. I never looked at it that way " making you income while someone else is paying it down" It makes so much sense now! Thank you plenty for the gem it's great food for thought I have a new angle added when it comes to investing.
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
Look at debt as a tool to become wealthy. It can drown you if you do not use it properly. Know all the risks involved, spend the time on the front end to educate yourself as much as possible.
Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
3y
@Daisja Vance HAVING debt is different than BEING in debt. Think of debt as a tool. If I can borrow $300,000 to purchase a $400,000 home and be cash flow positive, I am not in debt. I have $100,000 in net worth AND cash flow. Consider debt as an expanse on a balance sheet to create cash flow. If I owed $300,000 and had no asset creating cash flow, I would be IN debt. Hope this helps!
Look at debt as a tool to become wealthy. It can drown you if you do not use it properly. Know all the risks involved, spend the time on the front end to educate yourself as much as possible.
Hello Eliott, thanks for sharing your views I appreciate it!
@Daisja Vance HAVING debt is different than BEING in debt. Think of debt as a tool. If I can borrow $300,000 to purchase a $400,000 home and be cash flow positive, I am not in debt. I have $100,000 in net worth AND cash flow. Consider debt as an expanse on a balance sheet to create cash flow. If I owed $300,000 and had no asset creating cash flow, I would be IN debt. Hope this helps!
Hello Ryan, Thank you for this! it helps greatly with understanding how to make better decisions with money I appeciate the insight tons!!
Investor · Fort Lauderdale, FL · Member since 2020 · 1k+ posts · 755 votes
3y
Debt is a tool that can be used properly or abused. When they say the richest people are in debt, it doesn't mean they are poor or struggling. You buy a house for say 300k, and it cash flows +500/month above your expenses. That's a good debt. You owe 20k on your credit card paying 20% annual interest, that's a bad debt to have. Rich people generally don't keep silly debts and they use debt to make a nice income. Don't be scared of debt but also don't abuse it. If a debt creates a cashflow and/or future appreciation, that's a debt you should be happy to have.
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Debt is a slippery slope and a sliding scale. Use it to scale into a healthy, appropriately managed portfolio and reduce from there. This could mean 5 properties for you or 15. But do an appropriate amount to get yourself wealthy, then start understanding the underlying risks of debt and do your best to get rid of it.
Don't leverage yourself too quickly or inappropriately. Always keep enough cash in the bank to cover yourself, family, and investments for a manageable amount of time without NEEDING to sell anything.
My recommendation for folks that have regular W2s is to get into the 3-5 house, so smaller ish portfolio, with more quality than quantity locations. Ride it for 2-4 years, then add 1-2 houses in that portfolio no more in that mean time. Go for quality again, over quantity. Start angling to which you 1-2 believe in 5-10 years(I know this is a hard part) will yield the best return versus hold. So not your very best house, or worst, but likely you're middle one or 2nd best one. Start trying to recast, not refi, the other properties besides these two, and in 5-10 years sell 1 or 2 properties pay down as much as debt as you can with that. You'll have 3-5 properties with significantly less debt or no debt, that's something 99% of the world wishes to achieve.
Hello, amazing community!! So I have a question and I want the most blunt response, when starting out with investments how do I look at debt? I have started getting into business credit and I've been told when getting funds for any investment don't be scared of the debt, that all business owners have debt, and" the richest people are in debt" well as crazy as it initially sounded to me I've pondered on what to take from it. I honestly thought about the USA and how we have this great economy overall in history yet have just about the hugest debt as well right? So are the richest people in debt? I've warped my cerebrum trying to grasp the logic so how does it work for you guys? Has anyone started on just loans and if so would you mind sharing which kinds of loans and were they business loans? Leaping into this so excited to learn new things I have become consumed by questions I just enjoy seeing it from other perspectives if anybody has time to share theirs Im beyond thrilled to read.
There're two type of asset from collateral asset perspective: - with asset that's depreciating : eg: car, washer dryer, computer,etc - with asset that's appreciating: SF,MF, storage, auto garage shop,etc.
When asset keeps appreciating faster than inflation, you make money from the "debt", and that debt is actually capital asset not a negative debt.
Hello, amazing community!! So I have a question and I want the most blunt response, when starting out with investments how do I look at debt? I have started getting into business credit and I've been told when getting funds for any investment don't be scared of the debt, that all business owners have debt, and" the richest people are in debt" well as crazy as it initially sounded to me I've pondered on what to take from it. I honestly thought about the USA and how we have this great economy overall in history yet have just about the hugest debt as well right? So are the richest people in debt? I've warped my cerebrum trying to grasp the logic so how does it work for you guys? Has anyone started on just loans and if so would you mind sharing which kinds of loans and were they business loans? Leaping into this so excited to learn new things I have become consumed by questions I just enjoy seeing it from other perspectives if anybody has time to share theirs Im beyond thrilled to read.
Hi, I am also very new to this concept as most people view debt as a bad thing. I would recommend reading Rich Dad Poor Dad by Robert Kioysaki he explains how the rich buy assets and the middle class buy liabilities they think are assets. I think this book would give you a more clear understanding of how to use debt to become wealthy.
There is 'good' debt and 'bad' debt. First you need to be honest with yourself about what you can afford and realistic with your goals. Credit card debt should be avoided. Things like mortgages if done right, are normal and 'good' debt provided the interest rates aren't too high. Buying a rental where the tenant's rent covers your mortgage, property taxes, etc can help you get further ahead in the long run. Don't over extend yourself.
Hello, amazing community!! So I have a question and I want the most blunt response, when starting out with investments how do I look at debt? I have started getting into business credit and I've been told when getting funds for any investment don't be scared of the debt, that all business owners have debt, and" the richest people are in debt" well as crazy as it initially sounded to me I've pondered on what to take from it. I honestly thought about the USA and how we have this great economy overall in history yet have just about the hugest debt as well right? So are the richest people in debt? I've warped my cerebrum trying to grasp the logic so how does it work for you guys? Has anyone started on just loans and if so would you mind sharing which kinds of loans and were they business loans? Leaping into this so excited to learn new things I have become consumed by questions I just enjoy seeing it from other perspectives if anybody has time to share theirs Im beyond thrilled to read.
Hi, I am also very new to this concept as most people view debt as a bad thing. I would recommend reading Rich Dad Poor Dad by Robert Kioysaki he explains how the rich buy assets and the middle class buy liabilities they think are assets. I think this book would give you a more clear understanding of how to use debt to become wealthy.
There's an easy way to understand this.
Who would benefit if I'm the borrower or the lender ?
In the good old days, I have to sell my kidney to get a loan (just kidding, but in very very old traditional scheme, one need to have usury loan with 20% daily interest rate). In that case, the debt is giving ultimate advantage to the LENDER.
In modern banking western American system, the goverment is giving you a loan for 30 years with the same Fixed Rate, sometimes lower than inflation. That's crazy if you think about it, because the lender would be in worse position than the borrower.
So in America, with 10 year fixed , 20 year fixed rate, and 30 year fixed rate, the debt system is giving ultimate advantage to the borrower, not to the lender.
Think bout it.
I have an asset that's appreciating 6% annually, and I pay my lender only with 2.99% rate for 30 years, and the tenant is paying 105% of my mortgage cost. That's insane if you think about it. It is like gov. is giving me free money out of nothing.
You really dont need to read Kiyosaki to understand this. Just compare US financial banking system but with one in Ghana's.
Hello, amazing community!! So I have a question and I want the most blunt response, when starting out with investments how do I look at debt? I have started getting into business credit and I've been told when getting funds for any investment don't be scared of the debt, that all business owners have debt, and" the richest people are in debt" well as crazy as it initially sounded to me I've pondered on what to take from it. I honestly thought about the USA and how we have this great economy overall in history yet have just about the hugest debt as well right? So are the richest people in debt? I've warped my cerebrum trying to grasp the logic so how does it work for you guys? Has anyone started on just loans and if so would you mind sharing which kinds of loans and were they business loans? Leaping into this so excited to learn new things I have become consumed by questions I just enjoy seeing it from other perspectives if anybody has time to share theirs Im beyond thrilled to read.
Hi, I am also very new to this concept as most people view debt as a bad thing. I would recommend reading Rich Dad Poor Dad by Robert Kioysaki he explains how the rich buy assets and the middle class buy liabilities they think are assets. I think this book would give you a more clear understanding of how to use debt to become wealthy.
There's an easy way to understand this.
Who would benefit if I'm the borrower or the lender ?
In the good old days, I have to sell my kidney to get a loan (just kidding, but in very very old traditional scheme, one need to have usury loan with 20% daily interest rate). In that case, the debt is giving ultimate advantage to the LENDER.
In modern banking western American system, the goverment is giving you a loan for 30 years with the same Fixed Rate, sometimes lower than inflation. That's crazy if you think about it, because the lender would be in worse position than the borrower.
So in America, with 10 year fixed , 20 year fixed rate, and 30 year fixed rate, the debt system is giving ultimate advantage to the borrower, not to the lender.
Think bout it.
I have an asset that's appreciating 6% annually, and I pay my lender only with 2.99% rate for 30 years, and the tenant is paying 105% of my mortgage cost. That's insane if you think about it. It is like gov. is giving me free money out of nothing.
You really dont need to read Kiyosaki to understand this. Just compare US financial banking system but with one in Ghana's.
THAT IS A GREAT WAY OF PUTTING IT. You're really coming along in the money writing, Carlos.
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
3y
Sam, when you invest in a cash flowing asset don't call it debt, call it leverage. The difference is debt is something YOU have to pay back, leverage is something someone else pays back (your tenant, your business - however you want to look at it) - you just own the asset after it has been paid off.
Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
3y
Quote from @Account Closed:
Depends on the type of debt. Consumer debt should make you feel anxious to pay it off. Debt that is making you income while someone else is paying it down should make you smile and want to do it more. Leveraging other people's money and paying minimal taxes is how the rich get richer. To answer your question about what kind of loans, I started my real estate investing with a hard money loan to do a flip. Would not recommend doing that as your first investment. Then I got a HELOC on my primary residence and focused on buying rentals. Best of luck with your investment journey!
This is the perfect answer. I tell my kids (and everyone) debt is only good for ONE thing. And that is making you money. If debt isn’t making you money then it is bad debt.
You still need to be careful about over-leveraging. For a young person, buying a car with debt might make sense to get you to your job to make money. But you don’t need a new Lexus.
Even though debt makes me money, I’m still somewhat debt averse. It’s just my personal comfort level. I’m fairly lightly leveraged in my portfolio right now. I like to get as much debt as possible on as few properties as possible to reduce the closing costs. But across the portfolio I’m only about 33% leveraged, meaning I could borrow another 33-40% should an opportunity arise that I wanted to seize. I love having that flexibility.
I have started getting into business credit and I've been told when getting funds for any investment don't be scared of the debt, that all business owners have debt, and" the richest people are in debt".
So are the richest people in debt?
The richest? I'd say yes. The wealthiest? No way.
In the millionaire next door, the author thought he would find the most Millionaires in the 'richest' neighborhoods. He was wrong. They were in debt for their cars, boats, houses, etc and had very little wealth / net worth.
Rich is just a measure of what you earn in a given period of time- per month, quarter, year. 'They're rich, they make $200,000 a year'.
Wealth is a measure of time. How long can you go without earning anything and maintain your lifestyle. Most people are like 1 month wealthy. Sad.
I'd rather be wealthy. The wealthy utilize long term low fixed rate debt to finance appreciating assets. Whether a business does that or not depends on return on capital exceeding your rate and term risk.
Debt is a slippery slope and a sliding scale. Use it to scale into a healthy, appropriately managed portfolio and reduce from there. This could mean 5 properties for you or 15. But do an appropriate amount to get yourself wealthy, then start understanding the underlying risks of debt and do your best to get rid of it.
Don't leverage yourself too quickly or inappropriately. Always keep enough cash in the bank to cover yourself, family, and investments for a manageable amount of time without NEEDING to sell anything.
My recommendation for folks that have regular W2s is to get into the 3-5 house, so smaller ish portfolio, with more quality than quantity locations. Ride it for 2-4 years, then add 1-2 houses in that portfolio no more in that mean time. Go for quality again, over quantity. Start angling to which you 1-2 believe in 5-10 years(I know this is a hard part) will yield the best return versus hold. So not your very best house, or worst, but likely you're middle one or 2nd best one. Start trying to recast, not refi, the other properties besides these two, and in 5-10 years sell 1 or 2 properties pay down as much as debt as you can with that. You'll have 3-5 properties with significantly less debt or no debt, that's something 99% of the world wishes to achieve.
the comment that the rich have a lot of debt I find not to be true many times. Some of the wealthiest folks I know.. ( talking net worths of 20 to 100 million) many of them have little to zero debt.. They sold a business paid their tax invested in tax free munis and called it a day plus all their real estate is paid for.
I think outside of Bigger pockets we would be pretty surprised to learn how many people actually own real estate free and clear, certainly their primary home.
Rental Property Investor · Member since 2020 · 16 posts · 8 votes
3y
@Daisja Vance
Hi Daisja,
Debt is simply a tool and NOT a swear word. I’m guessing, like most of us, you know a lot more people who have been hurt by debt than those that it’s benefited. Think about this… If a person picks up a knife for the first time and cuts off their finger with it, guess what…. Knives are bad (from their perspective). But the knife was just doing its job!!
Too many people start out picking up the debt tool without understanding what it is. They only see what it can do for them in the now. When it’s time to repay the debt they are woefully unprepared! Because of this, and other reasons, the debt word has become stigmatized ! There are even people enriching themselves by perpetuating the myth that debt is the Devil. And I suppose if debt has cut you, you might buy into that mindset and spread the message that debt is bad.
Once you understand what debt is and how to use it, it can be a powerful tool that you can use to actually make yourself money. Look at it like a high jumper who has just discovered this tool called a catapult !You are in the right place here for learning what debt can do for you in real estate!
Debt is a slippery slope and a sliding scale. Use it to scale into a healthy, appropriately managed portfolio and reduce from there. This could mean 5 properties for you or 15. But do an appropriate amount to get yourself wealthy, then start understanding the underlying risks of debt and do your best to get rid of it.
Don't leverage yourself too quickly or inappropriately. Always keep enough cash in the bank to cover yourself, family, and investments for a manageable amount of time without NEEDING to sell anything.
My recommendation for folks that have regular W2s is to get into the 3-5 house, so smaller ish portfolio, with more quality than quantity locations. Ride it for 2-4 years, then add 1-2 houses in that portfolio no more in that mean time. Go for quality again, over quantity. Start angling to which you 1-2 believe in 5-10 years(I know this is a hard part) will yield the best return versus hold. So not your very best house, or worst, but likely you're middle one or 2nd best one. Start trying to recast, not refi, the other properties besides these two, and in 5-10 years sell 1 or 2 properties pay down as much as debt as you can with that. You'll have 3-5 properties with significantly less debt or no debt, that's something 99% of the world wishes to achieve.
the comment that the rich have a lot of debt I find not to be true many times. Some of the wealthiest folks I know.. ( talking net worths of 20 to 100 million) many of them have little to zero debt.. They sold a business paid their tax invested in tax free munis and called it a day plus all their real estate is paid for.
I think outside of Bigger pockets we would be pretty surprised to learn how many people actually own real estate free and clear, certainly their primary home.
Nobody that I know of as family friends or apart of my business network uses debt anymore. Most of these people are in that exact class. I'm doing it here in real estate, but way less than what most folks do here(all debt almost). I intend to get myself out of it in the near term, and always have the ability to simply cut a check and be rid of it. I don't have any debt I can't clear instantly.
I literally am the only person I know of that's using debt while stationing cash against it(kind of helps with these rates so high). I am losing on the swap % which is the opposite of what society and definitely BP society would tell you to do, but it's letting me get a bit more properties in areas I like easier. And I'm at peace knowing I will own the asset. It'll let me get another 10-15 properties in the next 1-2 years and I think that'll be a significant difference.
BP's view on debt is jaded by the low-rate environment. And people thinking the way you move financially should be strictly mathematically logical and completely disregarding behavioral tendencies. It's also why they pursue real estate, thinking it's an overnight way to fix their financial situation.
I think outside of Bigger pockets we would be pretty surprised to learn how many people actually own real estate free and clear, certainly their primary home.
I guess this is a generational problem Jay, if baby boomer has real estate free and clear it's not surprising if they acquire when the property is on the 1980s and during that time, mortgage to income ratio is like 1:20 .... the gov. policy is very very favourable to the baby boomer generation.
What's amazing is if someone in their 30s and 40s has sold their business in their 35-39 and when they just finished their school at 25-29.
I have started getting into business credit and I've been told when getting funds for any investment don't be scared of the debt, that all business owners have debt, and" the richest people are in debt".
So are the richest people in debt?
The richest? I'd say yes. The wealthiest? No way.
In the millionaire next door, the author thought he would find the most Millionaires in the 'richest' neighborhoods. He was wrong. They were in debt for their cars, boats, houses, etc and had very little wealth / net worth.
Perhaps what @Daisja Vance mentioned is at different level.
I know lot of conglomeration outside of USA and the way they do business is super crazy, in one cycle they could become millionaire, the next cycle they lost everything and in the next cycle they become billionaires again.
The way they do business is usually by making a 150% LTV loan, by buying a business, it could be oil wells, coal mining, or a forest ; depending on the sector, some sectors is going to a mega bullish year in 10 year period, buy coal mining for three bucks, only to sell it for three hundred ten years later. Outside of US, there're lot of heavy business speculators.
In US, it's also common in Venture Capital industry, from boom to bust cycle, now we're in bust cycle for them Lol, marked by the demise of SVB and FRC LOL
Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
3y
@Daisja Vance it's really simple. Having debt doesn't mean you're "in debt," or have a negative net worth. If your debt is $2m and your assets are $5m, then your net worth is $3m, despite having $2m of debt.
Developer · Member since 2020 · 4k+ posts · 4k+ votes
3y
You posed a lot of thoughts and questions under the concept of debt. Will respond randomly.
Record US debt good or bad. This causes inflation. At a base level. Every morning I buy a large Diet Coke at McD. Two months ago it was $1.09 and for years prior. About a month ago it went to $1.49. Doesn’t bother me in the least. A poor family it is a big impact. That same type of price increase goes across bread, eggs, peanut butter, chips, gas, daycare etc.
Do I like the inflation above?
No on my future investments. We slow down at 7% and stop at 9%.
Yes because we get to pay our existing debt with cheaper dollars. If inflation was at 7%, in 12 years I would be paying our debt at $.50 on the original dollar.
Good Debt Trap- why are you personally wanting business debt? Let’s say you have a lawn care and landscaping service. You want to expand out of your garage or trailer to a building. Stock market is good, lots of cash from Covid infusion still sloshing around, everyone is happy and spending money. So your debt is good debt, because it will help you do more business. What happens when there is a curve in the economy? Your business drops 40%. You can’t sell your building for the same price. You’re trapped in the mortgage. Now it is bad debt. The question is did you calculate your risk exposure and have other Cashflow or wealth to compensate?
Use long term debt for long term assets. Short term for short term. Don't take an ARM loan out on a 25 year asset. When you go to refi the interest rates or economy may have shifted.
Quality of asset- just because it is good debt, doesn’t mean the related asset is good, better or best. Let’s say you’re into rentals. Let’s compare two assets. Exact Same MFH, Exact same town. Exact same rental rates. But one town is Automotive industry. Other is College, medical, government town. Take Tesla moving outside of Austin. Market is hot. What happens if the Tesla formula changes or fails? Or you could have invested the other side of Austin and relied on government, medical and university environment. . Key is to be specific to your situation, risk reward and scaling model. All of us have different tolerances.
Is it time for you to buy a new lift for your cement block business? That’s good debt, so you can do more business. It’s bad debt if the economy falters and you don’t have reserves set aside to cover your shortfall.
