Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
Good debt is debt which pays for an income producing asset. That is, income from the asset pays the debt and leaves profit after.
Bad debt is debt which pays for a liability. The item itself produces no income and does not enhance your net worth.
The loan on your home is not entirely bad since it provides you with shelter while the equity build-up enhances your net worth at the expense of the interest you pay. The interest still provides a deduction against your taxable income, also.
Debt = risk. Sure, we can add risk to the balance sheet to help us leverage into a property. It can be OK to do that, but it incurs risk. Good debt/ bad debt? I agree its all bad debt. I would love to own what I have, but I have debt and the associated risk. @David Dachtera , people liked what you said, but the example of net worth paying for groceries is a logical fallacy because if you have no debt (and that high net worth), you could buy the whole grocery store, without crawling to anybody to ask to borrow.
Is it worth it (i.e. Good) to take on risk for a reward? Yes, its absolutely what the free enterprise system is about. Take on lots of risk? Not a long term success strategy, or is it.....
If you're equity rich but cash poor, you'd need to leverage something or sell it to raise the funds to make a new purchase.
I'm also VERY bothered by your idea that borrowing amounts to "crawling".
If I borrow to acquire an income producing deal or asset, I get the income (win), the lender gets income from the interest I pay (win). That's WIN-WIN, a mutually beneficial arrangement.
How does that constitute "crawling"?
I was at a property tour from my Renatus group over the weekend. The investor mentioned that he bought the house with money from a private lender, paying 10 points, no interest for 6 months, then 9-1/2%. He'll pay it back right around the 3 month mark (the sale should close a week from today (today is Monday, Aug 8)), for an effective annualized interest rate of 40% while making $57K+ profit after holding costs, repairs and expenses with no out-of-pocket. He said the lender asked when can he lend the money to him again?
If THAT's "crawling", I'll buy some knee pads and leather gloves and set world records for "crawling"!
Rental Property Investor · Rochester, NH · Member since 2016 · 116 posts · 27 votes
10y
Ok, so "crawling" has a high negative context. I am a newish RE investor, so maybe not seeing all the advantages of leverage. I see that life and business is ups and downs. Isn't our job as REI is to minimize the downs while maximizing the ups? Kudos for your example. My point is that debt, while useful, increases the down side. Yes, the project is good. The effort is good. The original discussion was good debt vs bad debt and if all debt is bad. I am saying that incurring additional risk is not a good thing, even though deals like the one you show are impossible without it. The opportunity to make lots of money is good, surely, but there is risk associated with it. The 1000:1 horse at the track has an awesome upside, but you have to accept and be ready for the downside too. Risk is baked into pricing of RE assets, so your skill as a REI is what makes the difference. Debt is bad, but its part of the risk we take if we want to use others money.
Show me ANY deal that IS possible without risk, and again, you'll found have found "the secret to nirvana".
Get over your negative view of risk. It is, as you said, part of doing what we do.
Just getting out bed is a risk. Statistically, the bulk of fatal heart attacks occur in the morning hours when people are rising and getting ready for the day.
Not using leverage INCREASES your risk because now you have exposure you wouldn't have with leverage, such as coming up short on funding.
Here's a little more about that example from earlier: he bought and repaired the house for $145K, but borrowed $175K on an appraisal of $225K in the house's existing condition before repairs. He knew he could make repairs for less than $30K, so the surplus was padding in case something came up. In this case, it didn't.
Probably one of the hardest parts of losing the consumer / employee mindset and acquiring an entrepreneurial mindset is learning to rather than avoid risk, embrace possibility in spite of risk.
Investor · Bryan, TX · Member since 2016 · 165 posts · 82 votes
10y
"Consider the tortoise who makes no progress until he sticks his neck out."
I love this!!!!!!
I'm may be wrong but I look at paying my debt as putting money into an account that I can't touch. (until I sell) If your net worth is 100k(debt) with a 15 year note, then in 15 years you have a 100k in the form of a house, in theory. So basically debt is me forcing myself to set aside x amount of dollars. I hope this works! I have my loans timed as to start being paid off the same time I retire. If it goes correctly, the year I retire I get a pay raise to to reviving full rent then every year after that is a paid off house with an increase in income. Yes the market will rise and fall but keeping in mind I only put 20% down..... If my 100k house is only worth 50k(at pay off)that's still a greater increase in my money than a special interest account will ever offer.
@Joe Au Debt give you chance to lock in assets shich you cant afford right now at full price, in process helping lock in at lower price compared to future inflation and growth adjusted price. Interest can be hedged if you play it correctly, instead of giving cash out to bank for debt payoff, it can be used to purchase debt once interest rates are higher to offset interest cost, and at the maturity u get property and bond both, without interest cost.