Quote from @Don Konipol:
So, you have a pretty common misunderstanding; you don’t distinguish between “good” debt and “bad” debt. Bad debt isn”t actually bad, rather it’s unproductive, and can be bad if overused, or abused. This is debt taken on to purchase DEPRECIATING, non income producing assets, like cars for personal use, vacations, food, clothing, etc. Most credit card debt, auto loans, personal loans used for consumer purchases fall under this category.
The “good” debt isn’t actually good, rather its productive. This is debt that help you acquire assets that either APPRECIATE in value, throw off income, or better yet do both. So for example a commercial building with a class A tenant paying a NNN rent of $120,000 a year acquired for $800,000. But you only can come up with $200,000. You borrow the other $600,000 secured by the property. In 5 years you’ve collected $400,000 cash flow over your note payments; paid down you’re loan from $600,000 to $550,000, and the value of the property increased from $800,000 to $1 million. Now these deals are rare, and may not exist in this low interest rate environment, but they do happen. And you can see that taking on the debt was a good idea.
In any case, once most investors reach a certain level of wealth, which differs for each person, they either eliminate debt all together, or, better still, they only incur debt for which they have no personal liability.
However, if someone is so uncomfortable with debt that they can’t emotionally separate debt for investment from debt for consumer items, than they’re probably better off limiting their expectations at to the beneficial aspects of real property investing. There will still be some benefits such as cash flow and inflation hedge, but the major benefit, leverage, will be eliminated and it will take 30 years to accomplish what can be done in 10 utilizing moderate debt with a moderate degree of risk.
Hi Don!
I'm planning on responding to everyone, but wanted to take a moment to respond to this post as I think you got to the heart of some of the feelings I've had since I began thinking and researching this business.
Yes, I've been uncomfortable with debt for most of my life due to seeing debt ruin people around me. However, I'd like to think that while I'm uncomfortable with debt, that I'm not afraid of it as long as it most definitely qualifies as the "good" or "productive" debt. In fact, my wife and I have had a lot of discussion about this and one of the first things we talked about what about risk and how we're going to have to get comfortable with it.
We're not risk averse, but we've definitely gotten comfortable and are willing to step out in faith. Having no debt is great, as long as you have the income or wealth to be able to retire without having to sell everything to live. And right now, I feel that's where we'd be at. So I'm more willing than ever to embrace the right kind of debt.
Having said that, is there a particular route that you would recommend or a direction you'd point someone like me in? Highly grateful for Bruces advice above regarding the HELOC but I've also seen the Home Equity Refi's and several others. Seems there are Pros and Cons to both (interest rate variability, repayment terms, etc), but being so green at this, I'm feeling a little like a deer in the headlights.
Thank you again and I look forward to hearing back from you!
Steve
Residential property, imo, is priced too high and returns too low, with a lot of risk of short - intermediate term price declines. I invest mostly in commercial property, and although prices seem high they actually have a much better cash flow. However, I’ve been wrong as often as I’ve been right about price movements, so it’s always a “best guess” , at least with me. I buy only when I find or am able to negotiate a good to excellent price, i.e., under “market” by a good amount, or property that has some extra kicker where the chances of appreciation in price are significantly greater than the general real estate economy.
If I just wanted to buy real estate at market value I would just buy into an exchange traded REIT or REIT mutual fund or ETF as a diversified portfolio of REITs should match inflation over the long term and provide increasing dividends. You won't get rich, or learn about investing in individual properties, but unless you get compensated for the added risk and effort, in the way of added returns, why do it?
This is a business, or more correctly an investment arena, where everyone thinks they’ve purchased a great below market price deal, and 95% have paid market price, they’ve just miscalculated the “adjustments” to the “comps” they’ve priced out, or the appraiser has. However, for those able to hang on through the downturns, real estate investing is very forgiving, with long term appreciation not only bailing out investors on some dubious purchases, but often resulting in large capital gains through dumb luck. I’ve had my share of luck myself. For those of us addicted to real property investing, we must love every aspect of it. My suggestion is that if you find you don’t love it, then invest passively through a REIT, private fund, or syndication.
