How should I view debt?

Investor · Member since 2022 · 3k+ posts · 3k+ votes

3y

Anyone that's thinking the investment environment today is anything like 2009-2022(first half) is highly mistaken. This is completely different, this is more like normal real estate investing in other countries and in other times. You buy your house, you don't leave your house, it'll get passed down. Great land and house on it is getting more and more scarce.

This post and some of your earlier posts in this thread should be required reading for anyone wanting to get into RE, especially in the current market and especially for some folks who think RE is a fix for their financial situation. Friends and family are often telling me they'd like to get into real estate and asking for advice. I just flat out tell them that you missed the boat if you're looking for immediate cash flow. And unless you're fine with just parking your money with little to no return for the next decade, look into something else.

This is not same as 2009 but this is not yet the same as other country investment. I checked Alabama price there're still lot of homes that can be cash flowing and price wise, even in bay area in Dec 2022, it scaled back to 2019 era price, so discount is there.

In office real estate, valuation has dropped to 2002 level, so this market is quite good actually *to invest* and *to buy* especially if you want to speculate more in the future whether office commercial would be okay in long run

For residential, 2022-2025 could be the highest appreciation rate era again as number of inventory is single digit in many zip code.
When interest rate is normalized in 2025, usually the market already catching up.

So invest wisely, I would invest only where supply is greatly reduced, not just random cash flowing $200.

The other country analogy is when generations own the same house. How many years does the average household stay in there house nowadays in America, 7-10 years?

I think that changes this time around.

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Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @V.G Jason:

Quote from @Carlos Ptriawan:

Quote from @Tony Kim:

Quote from @V.G Jason:

Quote from @Ray Hage:

The other country analogy is when generations own the same house. How many years does the average household stay in there house nowadays in America, 7-10 years?

I think that changes this time around.

This is very interesting. I have been wondering for years how could one city in US, have the same exact lousy house for $2 mil and in other place, the same house has $100k price LOL

The difference is the cost of the land. In most appreciable city like in CA/FL/HI ; a typical median income to mortgage is reaching 0.70 ratio sometimes, while in midwest it's still 0.29 ; so folks has to work really hard to purchase house in CA/FL. Just typical job in that state could not make people able to invest in a home.

So this ratio is relevant to your question "How many years does the average household stay in there house" ; I guess in typical market where mortgage/income ratio is still below 0.40, they could still move around, but in CA it's way much much harder to move around.

But I am also curious what makes house price is sustainable with mortgage income ratio about 0.70 ? This is my guess (there's no formal research on this), I guess in some local economy, the income in household formation raise so much that the mortgage/income no longer a problem because the household has two high double income family (lets say a household making $400k/year to purchase a $1 mil property. In this situation they could easily afford > $6k mortgage).

So to better answer your question, it all depends on household income formation every year. This year alone I read wage increase actually exceeded inflation rate, which means they could afford to buy more and/or buy more expensive house.

I guess in the future, mortgage income ratio of 0.60 would be the new normal, hence we still have long appreciation ahead of us. A declning supply of house and increasing wage in double income household is recipe for appreciation. Also raising stock market and more money being printed is another fuel for appreciation.

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V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

3y

Quote from @Carlos Ptriawan:

Quote from @V.G Jason:

Quote from @Carlos Ptriawan:

Quote from @Tony Kim:

Quote from @V.G Jason:

Quote from @Ray Hage:

The other country analogy is when generations own the same house. How many years does the average household stay in there house nowadays in America, 7-10 years?

I think that changes this time around.

This is very interesting. I have been wondering for years how could one city in US, have the same exact lousy house for $2 mil and in other place, the same house has $100k price LOL

The difference is the cost of the land. In most appreciable city like in CA/FL/HI ; a typical median income to mortgage is reaching 0.70 ratio sometimes, while in midwest it's still 0.29 ; so folks has to work really hard to purchase house in CA/FL. Just typical job in that state could not make people able to invest in a home.

So this ratio is relevant to your question "How many years does the average household stay in there house" ; I guess in typical market where mortgage/income ratio is still below 0.40, they could still move around, but in CA it's way much much harder to move around.

But I am also curious what makes house price is sustainable with mortgage income ratio about 0.70 ? This is my guess (there's no formal research on this), I guess in some local economy, the income in household formation raise so much that the mortgage/income no longer a problem because the household has two high double income family (lets say a household making $400k/year to purchase a $1 mil property. In this situation they could easily afford > $6k mortgage).

So to better answer your question, it all depends on household income formation every year. This year alone I read wage increase actually exceeded inflation rate, which means they could afford to buy more and/or buy more expensive house.

I guess in the future, mortgage income ratio of 0.60 would be the new normal, hence we still have long appreciation ahead of us. A declning supply of house and increasing wage in double income household is recipe for appreciation. Also raising stock market and more money being printed is another fuel for appreciation.

Wage increase over inflation is extremely detrimental to the economy as a whole. Ideally, wage increase should always be significantly lower than inflation. It'll driv hyperinflation, net positive for the investments we're making. But overall net negative for the economy.

My original point is in other countries, usually your family buys the house(all cash) and generations develop and grow in that house. I don't think America will be 100% like that due to lack of family formations, but i do bet the average homeowner is staying in their house longer than 7-10 years(I believe the average pre-covid). That's going to drive a lack of supply.

The other thing you mention is the underlying cost of land, and that to me is the TRUE floor of the investment. This is why I say buy good parcels in good areas, that's scarce. Cali/Hawaii/Florida(coastal especially) are absolutely primo, but there are other one's with a more accessible barrier of entry(sunbelt areas, arizona, texas, etc.).

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Todd Jones

Member since 2023 · 243 posts · 199 votes

3y

Debt is when you owe money to a creditor. No matter what, I owe money to someone. I use this as my foundation.

You may owe money to credit cards, bank, payday loans, mortgage company, Tony up the street with a thick accent, etc so I don't view them as "good" or "bad". It's debt. Even with a 0% financing, the lender will always be on top when you calculate the future value of the annuity (e.g., at the end of a 30 year 100k loan with 7% interest rat, the bank gets $239,508 in their pocket).

Now, there are two conditions.
1) The conditions of how you pay back the debit.
2) Can you pay it back.

So, when you have this fundamental down, this is how you can view debt decisions.

Examples:
- You rent a home and want to use a HELOC from that same house for the down payment of another home. So, what is the rate and amount per month along with the mortgage of the other home. By your calculations, can you pay off both the HELOC and mortgage for x months safely when you weigh all the possible factors? Then this is where the debit is a tool.

- You purchase a home w/ 30 year mortgage. Can you afford the monthly payments with ease ? You know what to do if you lose your job? If so, you used debit again as a tool for a home. No need to worry about it.

- You have to use a payday loan to pay another payday loan. This is where debit is serious as you have no end solution.

- You borrow 100k from tony as you know you can win the dice game. You lose and Tony says you need to pay up in 3 days...you get the point.

Overall, debit is still where you owe someone money. However, if you plan ahead, debit is a tool. If you buy impulsively with no plan, debit is extremely dangerous.

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Tim Bee

Investor · CA · Member since 2023 · 196 posts · 107 votes

3y

Use no interest credit card debt to buy homes. Its the cheapest hard money you will find.

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Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @Daisja Vance:

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 Daisja,

To explain thing in more extremely technical and complicated, here's the good very savvy article from SeekingAlpha why we should have mortgage :

https://seekingalpha.com/artic...

... when rates are low, attractive bonds at higher coupons get pre-paid early. When rates spike as they do now, RMBS investors (and mortgage REITs) get left holding the bag so to speak. It's lose-lose for the mortgage investor (and the mortgage REITs) and win-win for homeowners with mortgages.

Put differently, mortgage REITs rarely benefit from lower yields (and higher prices/asset values) on long duration paper (as bonds typically get called away). But they always get stuck owning mortgage paper that trades down when rates rise.

.....

So the way the mortgage debt is structured in USA , is making as the homeowner is always win-win (regardless of rate movement) ; while mortgage/debt holder/investor is losing money when there's volatility in mortgage rates.

Imagine Silicon Valley Bank bankrupt is because they are giving us money to purchase house literally LOL...
In other country, only 2Y ARM product exist (so there's balance of risk between mortgage holder and home owner).

What's crazy now in the USA is some of those lender goes bankrupt with those fixed rate for 30 years, while the asset value itself is actually increasing as residential home is started to going up.

Which means only one thing:

*Buying residential house in US with 15YFRM/30YFRM is no brainer investment activity*

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How should I view debt?

How should I view debt?

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