Let's talk Debt

64 Replies

@Jordan B. Since your convictions are religious, there is no point making counter arguments based on math and logic. You have already conceded that you understand that but do not wish to get into debt based on religious principle. That's fine and your choice. So the way to do a cash portfolio is very simple. Save money, buy a property. Take cashflow from rent, add to savings, buy next property. Take cash flow from 2 properties plus other savings, save more money buy a third property. The good news is you can tell banks to go f themselves (which I often wish I could do!), you can tell insurance companies to stuff it and carry just the insurance you need (which I wish I could do!) and if there is a vacancy, so what? It doesnt cost you cash out of pocket. The only reason I wouldnt do cash is that it would restrict me to only cheap properties. So for example I could never buy a house in the area I live for cash. Well, maybe I could but then I would have all my eggs in just that one basket. So I use debt but very conservatively. No cc debt, no car loans, nothing except mortgages on primary and investment RE. Since its just about risk management and not religion, I can choose the limited type of debt I like.

@Anish Tolia

You are right, I get sucked into an argument pretty easy I suppose. I guess that's just the pride in me!  You have a great no nonsense straight forward way of thinking, I like that!  

@Perry Ivy

Hence why i mentioned responsibly leveraged. There are plenty of people that were leveraged that did not lose anything in the crash. Some of them actually used that time to acquire more properties. If you did not sell, by now at least in my market you are at or ahead of where you were in 2008.. As someone on the forum said real estate is risky when you are over leveraged or undercapitalized. Most people who lost their shirt in the crash were both. Most of the people who suffered in the crash were more on the retail side and newer investors who were just jumping in or older investors who were highly over-leveraged. For everyone i know who lost their shirt i know someone who used it to strengthen their investing position.

I.E for me i always keep enough reserves to pay PITI for at least a year. In the area i buy (5 miles from downtown chicago) you will always have renters even if things are crashing. If i have no renters i can go a year paying from my reserves without paying anything from my personal pocket (which can also cover the debt if needed). Usually though you dont have all the units empty because you lower rents to attract renters. If you have a good cashflowing rental and reduce rents then you can still pay your mortgage and ride out the downturns.

I do not begrudge people who shun leverage. If that is your style and it helps you sleep at night then do it. Especially if you have acquired a significant portfolio or at the later part of life where preservation is more key. 

Nnabuenyi Anigbogu
Well said and I agree, I just oppose the belief that rent never goes down.

the Bible was written long, long time ago. 

America wasn't built on savers. 

I too am debt averse. The 11 units I have are all payed for with no mortgage. The properties I invest in one would not get a mortgage for anyway, all have been less than $23,000. They're work but not having debt lowers the risks. 

My own house was bought with a mortgage (will be payed off in 11 months)

@Perry Ivy I agree with you and don't believe rent never goes down. I do think in the long run it always goes up due to inflation similar to house prices in decent areas. You just have to be able to ride out times when it stagnates or goes down temporarily over a few months or couple of years.

Nnabuenyi Anigbogu
I didn't mean to be argumentative, I just try to represent the other side. Roses always have thorns :)

Originally posted by @George P. :

the Bible was written long, long time ago. 

America wasn't built on savers. 

 I agree with your part of your statement the bible was written long ago, and America was built on spenders. But without savers, who do you think is financing your mortgages?  It's not the banks money friend, it's people saving money in the bank that they loan out, lol. The bank makes their money from your interest. Hard cash, again people saving money. Please do study a little bit of economics before throwing out simple quotes.  The unchecked debt is ruining America. I'm not talking about a wise business man, but the one trillion dollars of student loans going into default, the over leveraged social security that is running out quicker than being replenished, the families that are losing their homes and marriages in turn because of debt. American economy was built by men like Cornelious Vanderbuilt, John Rockefeller, and Henry Ford. Who had the entreprenual drive and cash to see their vision through. So yes they "spent" money, their money and created economy for us all to learn from. 

Originally posted by @Jordan B. :
Originally posted by @George P.:

the Bible was written long, long time ago. 

America wasn't built on savers. 

 I agree with your part of your statement the bible was written long ago, and America was built on spenders. But without savers, who do you think is financing your mortgages?  It's not the banks money friend, it's people saving money in the bank that they loan out, lol. The bank makes their money from your interest. Hard cash, again people saving money. Please do study a little bit of economics before throwing out simple quotes.  The unchecked debt is ruining America. I'm not talking about a wise business man, but the one trillion dollars of student loans going into default, the over leveraged social security that is running out quicker than being replenished, the families that are losing their homes and marriages in turn because of debt. American economy was built by men like Cornelious Vanderbuilt, John Rockefeller, and Henry Ford. Who had the entreprenual drive and cash to see their vision through. So yes they "spent" money, their money and created economy for us all to learn from. 

 Wrong Jordon.  The bank "Leverages" all the "performing assets", like cash, loans, CD's, etc...into virtual money that they sell/loan to everyone else.  The least valuable asset they leverage is the cash we put in there...that's why it gets the lowest return to us.

...and all of those entrepreneurs you mentioned leveraged and borrowed like crazy.

@Perry Ivy

I did not think you were being argumentative. I love a lively debate with people who think differently or more conservatively than me. I tend to lean towards the more risky side (probably a product of being young and comfortable) and love hearing from the other side. It has helped me tame down some of my REI actions actually a . It also helps for newbies who are trying to figure out which route to go. Hence why i love REI forums.

Thanks

Nnabuenyi Anigbogu
I can tell you about the other side, I was diagnosed with a major medical illness in 01, the medical bills exceeded 600k, I lost everything including my health, but I started building back and then 08 happened. I am now where I was at 21 and I'm now 36, so I exercise great caution. I've notice that most of the time hype is sold on here and when I was 21 I bought into that, but now I'm older and wiser :)

I don't think this is so much a spiritual question as it is a rate of return question. I have a duplex worth $250K. I owe $108K on it and I pay 10% I/O to my private lender. It makes limited financial sense for me to pay off that loan with $108,000 real dollars just to save 10% when I can make 30-40% return on that same money flipping 2-3 houses in a year with it.

So, you write the check for $108K and sit on the sidelines happy that you collecting an additional $891 per month. I use that same money to create $30-40K each year by flipping properties. I could use the profits from each flip as pay downs on that outstanding lien and be F&C while still working my $108K cash. It would take you just over 10 years to get back your $108K, but I would be F&C and have my pile of money in just 3-4 years. I could then continue generating more wealth for the next 7-6 years while you keep collecting your $891/month waiting on return of principal.

What if you kept your money working, paid off the debt with the profits, then continued to work your money and used the additional profits helping others? In a real world situation, you might be able to give away $150K or more over those next 6 years.

@Joe Villeneuve

I'm not sure we are not saying the same thing about banks. You say all performing assets such as CDs, loans, cash, etc. these are all from people putting money into banks (saving). The bank pays a small amount for you to lend them money and they charge a large amount to loan you money and the difference between the two is their profit. Again, you have no savers you have no bank.

Again, I am not arguing that debt or leverage is bad. I believe like anything when used responsibly it's absolutely fine. I still agree in real estate that leveraging out performs cash.  And even from the spiritual point I made in the beginning of this conversation I do not believe debt is wrong or sinful, only that I prefer cash for previous reasons. We cannot argue matters of the heart for its different for us all. 

@Jordan B. I am no help as I had to leverage to buy every property I own.  I like being debt free and all my personal debts are paid off.  I have no house loans or car loans, no unpaid credit cards etc.  I business I would only own 2 or maybe 3 rentals if not for leverage.  It does make it more scary to have properties empty awhile if you have mortgage payments.  If I owned properties free and clear I could afford to be more picky about who I rented to.  I put my loans on 15 year notes in order to pay them down as quickly as I can, and do not take any money out of the corporation.

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Originally posted by @Jordan B. :

  My reasons are spiritual in nature, the bible says to owe debt to no one, and to only owe one another love. It says the debtor is slave to lender.

@Jerry W.

My wife and I too have indeed used debt in the past but as you said once your out of it it's a good feeling. Now that it's a choice I like staying that way!  Thanks for responding Jerry I enjoy your input on these forums and have a lot of respect for you!

Originally posted by @Jordan B. :

 My reasons are spiritual in nature, the bible says to owe debt to no one, and to only owe one another love. It says the debtor is slave to lender.

My interpretation of the bible is different. The bible was written for the masses to teach basic principals. In this case I believe the purpose of these passages was to warn people against consumer descritonary debt - think credit card debt, car loans, etc ... bad debt. These are issues that still plague the masses today (no pun intended)... timeless principals.

I don't believe the purpose of these passages have anything to do with good debt that will better society.

@John Smith

You know I'm with you on that. I think I posted earlier I don't even really believe it's a sin issue when you get down to it. It's more of a if I don't owe people anything I am more likely to have my time and attention to help and love one another. And you are right, it's the consumer debt that is ravaging people's life right now. I'm not anti leverage on principal by any means, we are just doing it debt free and having great success and I was curious if anyone else out there was. Again I hope for success for all of us!!!

There is some good info and examples of debt free RE in this thread:

https://www.biggerpockets.com/forums/223/topics/203645-successful-investors-who-use-dave-ramseys-strategies?page=1

Note Justin Workman's Michigan portfolio.  And the example of one of my buyers that owns $4M in free and clear RE here in CA.  Both Justin and my buyer admit to an emotional preference for debt free rentals. Sure, they could do more with leverage.....but they choose not to.

Originally posted by @Jordan B. :

Hello everyone, I am curious if anyone has built a successful portfolio debt free. I am not arguing leverage vs debt, leverage wins everytime hands down, no argument here, I own a calculator, pencil and paper.  My convictions are purely personal. This isn't a Dave Ramsey vs Robert Kiyosaki thing either. My family of five has no debt to anyone, we own our home, cars, and toys outright. 70% of my income is cash flow this way.  My reasons are spiritual in nature, the bible says to owe debt to no one, and to only owe one another love. It says the debtor is slave to lender. I believe these things to be true, not forcing them on anyone I just want to get rid of the argumentative points of this question so I can get some real feedback. Obviously I am willing to grow slower in my portfolio and understand that, I just wanted to hear if anyone here has done this too!  Thanks everyone for not telling me how dumb this is and how leverage is awesome, and how much more money I can make. We have done very well in our life operating in cash and the Lord has honored that and I believe he will the same in this scenario as well.  The bible says we are to be a peculiar people, so against the grain we go!  So....anybody done it

This will sound odd initially, but I think you're talking "separation of church and state". Here's why...

Yes, that's what the Bible says. The Bible is not about economics or captialism, it's about humanity, compassion and philanthropy once you wade thru all that worship stuff (the ultimate anthropomorphism, and, frankly, the deepest insult toward God which could be made: thinking of Him as having the human weakness of wanting or needing praise and adoration like some kind of emotionally needy despotic monarch who needs to be kept appeased to hold his wrath at bay). 

In the Bible, Jesus said, "Render unto Caesar that which is Caesar's", in reference to the image on the coinage used to pay taxes.

That said, consider the meaning of the word "arbitrage".

Dead equity produces no income. This is the fallacy of the "debt service vs. 'free' cash flow" argument. In the case of real estate, the income it doesn't produce adds to the expenses of taxes, utilities and upkeep making the liability even greater.

The point about the debtor being "slave" to the creditor, while valid, discounts the idea of borrowing your equity out at x% and lending it back out at 2 times x or 3 times x: your debtor repays your lender and the spread between the two interest rates is income to you.

The banksters make a fair part of their profit this way: they borrow from the Fed at 0.25% or so and lend that same money back out at anywhere from 3% (12 times what they pay, current mortgage loan interest rates) to 34.9% (120+ times what they pay, penalty rate on some credit cards). Sweet deal for them, no? (...and they still charge fees on top of that!)

I think it depends on what your goals are.  In the beginning our plan was to buy a small portfolio of 10 units, then we would use all the cash flow to pay down the houses while working full time jobs.  After about 10-15 years the houses would be paid off and we could "retire"

Then we switched plans and decided to leverage and buy a larger portfolio (60 units) that would cash flow enough to live comfortably after the mortgage payments.  We could leave our corporate jobs now and pay off the loans when they are due (25 years)  We will be putting extra profit to pay down the loans early, but it is not in our plan to aggressively do that.  

@David Dachtera

You raise a good point about the bible and the working economics of our country. They really are separated in nature. For one is definitely about humanity, relationships and a higher authority.  Obviously economics is essentially trading, selling, numbers and equations governed by mans laws and supply and demand. 

  I guess the only real connection is how we conduct our business in the economy based on our view of the world, with debt or no debt really at the bottom of a long list of business practices. Are we fair with each other, do we maintain our integrity, do we pay our taxes, are we taking advantage of poor people or bad situations (different than arbitrage) in which all parties can benifit from equally. 

This conversation can flow so easily between ethics and business practices that it stirs up emotion pretty easily. At the end of the day we are all wanting to make money or we wouldn't mess with it, so a common end goal and lots of ways to get there. Thanks David!

I'm on the fence - not with the replies of this thread, but with the way I invest.

I feel its debt free but it's not:

I buy homes outright rehab and rent, but I pull down from a 403B. That's a loan that I never notice the cash I  payback because it's deducted automatically from my check. The max they take is 880 a month and the lowest rent I'll take is 1K.

The max withdrawal is 50K I'm well over the 100K mark in my account so if I lose my job that debt is deducted and I have a nice amount coming. The length of the loan is 5yrs max, but I never make it that far before paying it off now that I own a few homes.

I can see myself purchasing two homes a year now but although I'm pro being debt free. My goal is to acquire a multi unit loan that will pay for itself with profit.

I believe taking the debt route is a faster way to wealth - I'm in no rush. I'm happy making more and doing less each year.

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