No Debt Is Freedom

Tom Goans · 2013-06-29T04:16:59-07:00

No Debt Is Freedom Consider this: Your money working for You when you own a residential rental property investment. The tenant goes to work each day to pay you to live at your real estate investment. However, You are working for someone else when you have debt. You work each day to accumulate money to pay off the debt. You pay extra for the use of the borrowed money. In effect, you are working for those who provided you with credit. You are paying for their new auto, fancy office, and gold watch. Being debt is freedom. It is fascinating how many ways having debt can be justified by some. Do you own the real estate investment if there is a loan secured by the real estate? No. Stop making the payments to the lender and find out who really owns the real estate. If you have credit card debt, some of your money is paid to the credit card company instead of going to family enjoyment, education, or retirement. You are working for the credit card company. The same applies to all credit. No philosophy, just a fact. Some argue the recent recession was caused by excessive debt of all types at all levels. The root of many recent real estate foreclosures was excessive debt. Being debt is freedom. It allows more freedom for your family and future. Add up the interest paid on all the debt each year. How much education will this buy? How much will this fund a retirement account? Your comments and thoughts are welcomed and encouraged.

Mark Ferguson

Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes

13y

Tom Goans,
I don't see any condemnation,
I see questions being asked about what you feel is the best way to invest without debt and without a lot of cash.

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Lynn McGeein

Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes

13y

I would also love a discussion on where OP said, "I am on a crusade to encourage opening up the mind to the limitless possibilities." I am a pretty good researcher and have not found a way, short of inheritance, of course, of buying property with both little to no money and using no debt.

The best I could come up with, given our situation, was buying 10-15 rentals using debt (about halfway to goal), then selling half at a future date, pay off most of the other ones with the profit, and be mortgage free with rental income supplementing retirement, so I understand the basic idea of eventually having no debt, just not sure how someone who can't just pay cash when a good deal presents itself would build up a real estate portfolio without any debt involved. If you could list even a few of your limitless possibilities for no-debt real estate investing, I'd love to consider them.

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Ben Leybovich

Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes

13y

Tom Goans You are obviously an intelligent man. I see a lot of insightful posts from you on these forums. I wonder - are you playing the role of the devil's advocate to an extent just to stir things up?

Guys - let us remain well-spirited here. The world of business, finance, and life in general is never boring because it is full of dualities. Debt is, like so many other concepts, is a sword that cuts two ways. But so are terms like Asset, Liability, Income, Expense, etc. I mean - if you ask 10 CPAs what is an Asset they'll tell you that its an item of value which can be owned. Does everyone agree?

I do not - just because something has value does not mean it's an asset. It is the relationship of the balance sheet to the income statement that is important. So coming back to debt - it is a tool, nothing more and nothing less...take it or leave it, but let us stop making it an emotional thing - it is not!

Now - some food for thought: Everyone agrees I think that over the long term we will continue to experience monetary inflation - such is the stated goal of the FED. If so, a question:

At an average inflation of 3%, would you rather control an asset base of $300,000 or $3,000,000? Think about it and think big :) Jeff Brown chime in here. They won't believe me cause I am young, but for their own good they better listen to you...

All kidding aside - this is a loaded subject. I wrote an entire eBook about this stuff! Understanding of these not so basic principals is crucially important for financial success...

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J ScottPro Member

Moderator

Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes

13y

Originally posted by Tom Goans:

It is all right to disagree with my viewpoint. However, is it counter productive to condemn the messenger or the opinions?

We haven't even heard the opinions that would be beneficial...

You say there are limitless options without debt, but you haven't mentioned ANY. If they are limitless, why not throw out five or ten of them...

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Ben Leybovich

Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes

13y

And Tom Goans I think that in order to achieve some sort of an even ground in your argument, it would serve you well to acknowledge that it is indeed easier to be debt free for a 3rd Generation Investor and Developer - it is Tom :)_

May be you can have this argument with my kids in 30 years or so lol

1 Reply

David Krulac

Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes

13y

This discussion is hauntingly similar to a recent discussion of Dave Ramsey versus Robert Kiyosaki. One of them advocates no debt and the other advocates more debt.

I'm firmly in the middle. Some debt works for some people, particularly when you are starting out sans silver spoon. But on the other side debt has not worked out so well for some people. One person I know well lost 32 houses, all of course heavily debt laden. Curiously he only kept 2 properties, both debt free. One real estate investment club that I'm familiar with has had every leader since its inception either declare bankruptcy, had foreclosures or both; sort of the curse being a baby guru?

And there is also the curse of being a big guru, as many have weathered the bankruptcy/foreclosure storms themselves.

I've seen the statistic/factoid, don't know where it came from or even if its true, that most divorces are caused by financial/money problems.

Someone famous when asked how much they were worth said they didn't know how much they were worth, but they owed $13 million dollars.

I look at real estate investing as being a three phase process:

1. Starting out, typically with little or no money and not having wealth to start. Without financing its hard to move forward, not impossible but harder.

2. Middle phase, thinning the herd, getting rid of less desirable properties, acquiring new better properties, moving up and out. Maybe some properties financed, maybe some properties with no financing.

3. Seasoned investor, maybe still buying some property, maybe not at the same volume as earlier. Maybe slowing down and looking at preserving what you have, maybe moving into retirement, and/or passing the torch to a younger generation or newer investors.

Debt can help you and debt can hurt you, sort of like a chainsaw.
Use correctly it can be of great benefit and a great time saver. Used incorrectly and somebody could get bloodied.

6 Reply

Frank O.

Little Rock, AR · Member since 2013 · 11 posts · 1 vote

13y

Based on my fundamental knowledge of REI more having to do with Robert Kiyosaki's teachings, good debt would be arbitraging the banks money to build leverage while bad debt would be consumer spending, maxing out a credit card. I would rather have good debt but use it in moderation.

0 Reply

Bryan Hancock

Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes

13y

I find on forum posts that when one is asked repeatedly to defend their overly-simplistic statements and they fail to do so and/or blame people for attacking the messenger it is generally because they realize they’re wrong. This is seldom coupled with an admission of being wrong or any other posts of value so I expect for this thread to go the same way. Hopefully I’m wrong about this point.

I too would love to be enlightened about the infinite amount of ways to grow my capital stack without debt. Hopefully we’ll gain this understanding later in this post so we’ll all be better investors as a result of our new-found knowledge.

1 Reply

Jeff Brown

San Diego, CA · Member since 2008 · 59 posts · 46 votes

13y

I'm sorry, and don't mean to sound harsh or unkind, but this discussion is a whole bunch about not much. Free enterprise capitalism is just that, the freedom to make wise choices in the marketplace. The acquisition of real estate using debt can be done wisely, with solid timing, using fundamental principles. It can also be abused by the DIY crowd who've provided comic/tragic relief for generations.

The opposite extremes in this debate are 1) Never buy real estate using debt. 2) Buy all your real estate with none of your own money. They're both relatively ineffective when compared to investors applying known principles, with wisdom.

I'll end with this observation. Those buying with all their own cash as the sole method of acquisition will do fine. Those using 100% financing will, for the most part, be financially demolished, with few, albeit loud and visible exceptions. However, those using all the basic fundamentals properly, including reasonable debt, will slaughter both of these approaches every time out.

This is excellent post material. :)

2 Reply

James H.

Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes

13y

Tom Goans,

So then tell the average guy who makes 30 to 60K a year and has about 5K in the bank how to get into real estate investing without using debt.

Give a rough investment plan with a timeline of goals. Show all of us debt free nay sayers how we can do what we want to do in RE without using debt.

0 Reply

J ScottPro Member

Moderator

Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes

13y

Originally posted by Jeff Brown:

Those buying with all their own cash as the sole method of acquisition will do fine. Those using 100% financing will, for the most part, be financially demolished, with few, albeit loud and visible exceptions. However, those using all the basic fundamentals properly, including reasonable debt, will slaughter both of these approaches every time out.

Perfectly stated.

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J ScottPro Member

Moderator

Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes

13y

Originally posted by Bryan Hancock:

I too would love to be enlightened about the infinite amount of ways to grow my capital stack without debt. Hopefully we’ll gain this understanding later in this post so we’ll all be better investors as a result of our new-found knowledge.

I've asked twice...still no response...

Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)

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Robert Steele

Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes

13y

I didnt read Tom Goans post as a debt versus no-debt debate, or as a crusade or condemnation against those who use debt.

I read it as a simple truism.

When you pay interest on the mortgage you are working for the holder of the note.

Ali Boone doesn't think she is working for her bank but she is. She found the property, put together the deal, maybe also fixed it up. She keeps up with the maintenance (I hope) and maybe manages the tenants.

What is the bank doing? Nothing - just collecting the fruits of her labor. They didn't even loan her the money. The money was created out of thin air when she signed the deed of trust. In fact she created the money by the act of borrowing it. Weird I know but money is debt in a fractional reserve system. Anyway I am getting off topic.

The bottom line is even if we pay off all our debt we are still working for someone. The taxman.

0 Reply

Ben Leybovich

Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes

13y

Robert Steele Love you man - can't take this argument no mo. Brandon Turner wanna jump in and break up this fight. poor J Scott is on the floor some place having violent convulsions - I know cause I am too Ali Boone is about to knock heads, and she don't take no prisoners hahaha I should know! lol Better step in here

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J ScottPro Member

Moderator

Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes

13y

Originally posted by Robert Steele:

When you pay interest on the mortgage you are working for the holder of the note.

By that reasoning, by owning property, you also work for the government, as you're obligated to pay taxes to keep the property.

Take it a little further, and you're working for the HOA association, the insurance company and the utility companies. If you have a Property Manager, I guess you're working for him too.

So, I guess what you're saying is that if you don't want to be working for other people, you shouldn't own property...

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2 Reply

Robert Steele

Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes

13y

Originally posted by J Scott:

Originally posted by Robert Steele:

When you pay interest on the mortgage you are working for the holder of the note.

By that reasoning, by owning property, you also work for the government, as you're obligated to pay taxes to keep the property.

Take it a little further, and you're working for the HOA association, the insurance company and the utility companies. If you have a Property Manager, I guess you're working for him too.

So, I guess what you're saying is that if you don't want to be working for other people, you shouldn't own property...

Following that logic to its natural conclusion, yes I guess that's so.
At least one can get out from underneath the bankers thumb. Not so sure about the other ones. Then there's taxes.

I am thinking about Tom Goans point in more philosophical terms. Just like you are working for the bank your tenants are also working for you. That's why it's nice to have doctors and lawyers and such as tenants. You are working for the bank. There is a ratio and place I'd like to sit upon it.

I'm not sure anyone can ever be free. There are always taxes. You can never truly own your properties. If you don't pay taxes you'll find out who really owns them. So even if not having debt gives you more freedom you will never truly be free.

0 Reply

Mark Ferguson

Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes

13y

And the government is in debt to china, so the US works for china. The government is also in debt to citizens who buy treasury bonds so actually the government works for the citizens and China, but anyone who owns property works for the government and anyone who pays taxes works for the government. My bank borrows money from me in the form of a checking account and I borrow money from them for houses so we both work for each other. Basically every one works for everyone.

What I care about is how much return I am getting on my hard earned money. I really don't care who works for who. I work within the rules that are given too me and adapt and do the best I can. I've done plenty of analyzing and racking up debt is what makes me the most money. I am perfectly fine with it and have no worries about the debt. It makes me money and I love that. Just like my checking account makes my bank more money. They pay me. Tiny interest rate and loan it out higher. I pay a relatively tiny interest rate on my loans and make a much higher return. Some people don't like debt and that is fine too.

1 Reply

Harry M.

Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes

13y

I've been following this one with quite a bit of interest...
Owing the bank money is certainly an obligation, and you can argue that the more obligations a person has the less freedom they have. Personally, I don't think it's that black and white (for example, I don't think the obligation to look after my family is a loss of freedom), but lets say that to an extent that's true.

But I think you have to consider other factors in tandem with the obligation of the debt. You can argue that having more money coming in represents an increase in freedom. Again, not black and white IMO, but certainly I think that you can argue that as a person moves from not having enough money to being comfortable, that the extra money affords that person more freedom.

So I think you have to weigh the loss of freedom due to the obligation versus the gain in freedom due to increase in financial independence that the returns on the banks money affords you. Does this represent a net gain or loss of freedom? Who knows? Each individual is going to value each side of the equation differently.

Here's another loss of freedom - having to work for the man in order to provide the basic essentials for you and your family. How much of a loss that is depends on how rewarding your job is, how good your relationship with your boss is, etc, etc, but there's always a compromise there. You can't just say "meh, I think I'll just garden today instead of work!". And there's always the fear that you'll become obselete, too old, too expensive, etc, and wind up looking for work at an inopportune time.
Suppose that a person had enough invested, that with sensible use of leverage, they were able to earn enough of a return to cover their basic essentials. I haven't made it there yet, but I know that when I do it will change the entire way I think of work. I doubt that I'll immediately retire, but it will change to something I want to do rather than have to. That's quite an increase in freedom to offset the loss in freedom involved in having the obligation of the debt.

2 Reply

James H.

Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes

13y

When using debt to acquire property, I consider myself to be a shephard of the bank's money. No more, no less.

0 Reply

Annette Hibbler

Real Estate Consultant · Brighton, MI · Member since 2013 · 607 posts · 251 votes

13y

To say that "no debt is freedom" is consumer minded thinking. Rather, knowing the difference between good vs bad debt is freedom to invest, grow your asset portfolio and your income. I think it was Warren Buffet who said, "owe nothing, but control everything"? Using your own cash exclusively limits your ability to expand your real estate portfolio and subsequently your cash flow. My advice is to borrow wisely!

1 Reply

Wendell De Guzman

Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes

13y

Warren Buffett loves to invest in companies with zero debt. He is afraid of overleveraged companies. We can learn from the wisdom of the most successful investor in the world.

As Kiyosaki said debt is a 2-edged sword. It can harm you if you don't know how to use it or it can help you if you know what you're doing.

0 Reply

J ScottPro Member

Moderator

Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes

13y

Originally posted by Wendell De Guzman:

Warren Buffett loves to invest in companies with zero debt. He is afraid of overleveraged companies. We can learn from the wisdom of the most successful investor in the world.

I'm pretty sure that 99% of successful investors would agree that over-leverage is a bad thing. You don't need to be Warren Buffett to hold that view... :)

That said, even Warren Buffett's company (Berkshire Hathaway) has a debt:equity ration of about 32%. So, even Warren understands the value of debt...

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3 Reply

Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

13y

Well first of all Robert Steele, I'm not doing much work on anything or for anybody. I don't even manage my own properties, a manager does. The most work I do in a year is respond to a couple maintenance emails. What work I am doing, however, pays off because I make cash flow from that "work". I also get tax benefits, equity, leverage potential, you name it. So who cares if the bank is benefiting by me doing that? I don't care about them, I only care about me. And I'm making nice money off my properties. Plus, more power to the bank for making money off of me (however, not much because interest rates are stupidly low right now) because by them lending me the money they are allowing me to buy things, and profit, in ways I wouldn't be able to if it weren't for them. So it's a win-win for all.

If I were to stick to your mentality, I wouldn't even be able to buy clothes at the mall because I'd only be 'benefiting the company' by buying clothes. When in reality, I'm willing to let them profit from my purchase because I have no desire to make my own clothes myself, nor do I know how to. And quite frankly I don't care what their profit margins on my purchase are because I'm getting clothes I like.

The only time I hear arguments like yours is when someone is pissed off they aren't making as much money as someone else and being bitter and petty about it. Who cares who is making what money? You should only care about what money you are making, and if someone else makes money but that allows you to make more money, so what? If you had a million dollars to loan and could make a nice set interest rate off of doing it, you'd be stupid not to do that. Easy money. That's all the banks do, and they are smart for doing it.

If I spent my life focused on what everyone else was doing or getting, I'd be wasting a hell of a lot of time not having my own fun and making my own success. But if that's what floats your boat, rock on.

5 Reply

Mark Ferguson

Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes

13y

Ali Boone, Love it!
I used to be jealous or envious of people with a lot of money, then I realized it is much healthier to be in awe, or appreciative of people with a lot of money. We can learn a lot from those people and they are probably willing to teach us if we wanted to listen.

0 Reply

David Krulac

Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes

13y

Annette Hibbler

I thought it was John D. Rockefeller who said that?

Mark Ferguson

I've never been jealous of another's wealth. I really could care less. I only care about my family's well being and providing the means to secure that.

1 Reply

No Debt Is Freedom

No Debt Is Freedom

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