Sure if you didn't borrow the money you would still be paying rent and would not have any wealth!

Paying cash is simply a transfer of wealth, not necesarily "building wealth" you are changing a cash investment into a real estate investment. Building wealth is the type of return you get on your equity.

Well you didn't tell us what yours is worth today but I have a feeling you are building wealth too. They have made about a 20% return on their money. For simplicity's sake let's say that was over 1 year. Let's say your place is now worth 95,000, you put 18,000 into it and it has appreciated 5,000 BUT you have paid 2400 in interest, so your real gain was really only 2600. That would make your return around 14%, not quite as good as 20%, but not too shabby either. I hope this is the case, at any rate you are doing good, don't beat yourself up, the people who make more and can invest more will always do better, that is the power of compounding!

Yup, Dave Ramsey went broke because he mis-managed his real estate portfolio, at one time supposedly worth 400 million. He did it though by building a pile of paper and when banks suddenly called in some short term notes he got caught with his pants down.

I don't think that's what anyone here is advocating. For myself, I generally only have two or three outstanding mortgages at any one time. I also have another business that produces enough income to cover any shortfalls if they should occur, as well as fully paid off income producing properties. Like I mentioned earlier, you have to be able to cover your nut should something go haywire. As ET1 mentioned, it helps tremendously to have multiple properties, so that they can help to cover any shortages in another area.

I fully remember how scary it was when I took on another mortgage when I first got started because I just didn't have the backups to help pull me out.

That's good stuff! You must have really done your due dilligence and bought right. :)

Well, I guess it all comes down to what type of return you can get on your borrowings. Due to competition, the return farmers tend to get is very low, let's just say 4%. Sure it doesn't make sense to borrow money at 10% just to make 4%, but what if it is the other way around borrow money at 4% and make 10% off of it, that leaves you with 6%! Money you wouldn't have been able to make otherwise. Sounds like a pretty good deal to me. So I guess it all boils down to what you are paying for money compared to what you can make off of it, and to do this comparison properly you have to be able to make a pretty good prediction on what your return is going to be. And obviously borrowing money just so you can eat out is just a bad idea!

Ah, another thing I have recently realized about borrowing for investments (be it for stock or real estate). You pay interest on a simple basis, however, growth occurs on a compound basis.

Example lets say you buy 10,000 dollars worth of stock on margin, Year 1 you pay interest on 10,000 @ 7% and you earned 10% therefore you made $300. Year two same senario but now you are starting with 10,300, you still only pay 700 in interest but this year you earn 1030, making your return $330, and so on and so on. Compounding working in your favor is a wonderful thing! I have noticed this on my properties, it is great! Another thing to consider is that that morgage payment should be fixed, your property may barely break even now, but 5 years down the road, you will have increased the rent 20-30 percent and it will cash flow nicely!

The problem with above notions is that in reality.
The interest rates on business/investment loans are around 10%(low risk) and the real profit found from investment is about 12%. In real estate the 12% return includes property appreciation.

Here is one for you real estate tycoons......
If your collateral for the note goes down in value you must Make good to the original loan percentage.

Say you buy a property for 200,000.00 leveraged for 80% Or 160,000.
You have had it for 2 years. So the note is paid down to 155,000.
Now the local market has a bad week(local plant closes or some such) and the real estate market falls by 25%(often happens).
So the house you paid 200,000 for is now worth 150,000 . You think I'm golden it's just 5 grand right...... Nope.
You agreed on a 80% loan to value so you owe the bank 35,000 to keep the note. Not so easy to come up with if you have a few that do the same thing. How many "investors" have property in many areas to diversify?

Edited to add.... They are much less likely to foreclose on a primary home (bad press).
But rentals are free game and by the time they get it back it will usually go back up in value to the original loan amount. So they lose nothing. Remember a bank has teams of people to make them money......You have you.

I remember reading that housing is so expensive that they have 99 year mortgages in Japan. The parents take out the mortgage and it is automatically transferred to the children if the place isn't sold.

The ONLY good debt is the debt you USETA HAVE....It's better to be broke and owe no one than to have riches and owe everyone.

I wish I could get 10% for one of the loans I make! Most of them are running around 7-7.75%, most of my customers are getting about a 20% return, fourtunately my area's economy does not rely on 1 or 2 industries, so the one plant going out of business senario is generally not a problem although there is always the possibility of a down turn in the market. And no, we (and to my knowledge most other banks) will not "call" a loan simply because the LTV has dropped below 80% or whatever the loan began at, only if the payments are past due, and no, we do not want to foreclose on properties rental or otherwise, because yes, banks do lose money, if anyone knows anything about the S&L's (there were other things involved but a fall in RE values precipitated the crisis) We usually do everything we can possible do to avoid a foreclosure because they take an enormous amount of time, and involve considerable amount of expense (the attorney, the taxes are usually not paid, and if we end up with it the RE agent) we VERY rarely come out of one whole.

Who?

No, I have not.

Bare,

You have a valid point, as long as a person could easily afford to make the payments if it went unrented.
You are still wasting money on interest, IMHO.
If I had the $40,000 to pay cash in full for the property, I would have $23,000 to invest in other real estate or investments.

FWIW, there used to be a guy in our area that owned rental houses. He borrows nothing from the bank, and only pays cash for houses. His cash flow is so good that he buys on average 5 houses a year. Last I heard, he owned 100 houses outright. That is truely building wealth in my opinion.

Now on the other hand, there was (WAS) a guy in town that owned a bunch of rentals. During the early to mid 90's, there was a huge housing boom in our town. The town was growing like gang busters, and property values soared. $55,000 houses were selling for $100,000, and were on the market for a day. Rental units...one bedroom scummy places were bringing $650 month, if you could find one. So, this guy bought and bought houses. I think he owned 47 in total, all on borrowed money. The bottom fell out of the housing market, a huge factory closed, and this guy lost everything when he couldn't keep the places rented.

Clove

Matt,
So you are a banker??????
Clove

There was more than one guy in 1929, that probably wished he hadn't leveraged quite as much money to buy stock. Stock goes up and stock goes down, and while folks like to bounce that 10% figure around, I'm more of the opinion returns average a bit closer to 8%, and that only works if you get out at the right time.

While that stock may be decreasing in value, the interest on the money borrowed remains constant. And compounding....

Yeah! Didn't you look at my profile!

All this comes from the fact that I have watched 100's of people make fortunes(faster and/or larger than everyone else) by utilizing leverage wisely, and I have only seen it bite 1 or 2 people that really knew what they were doing and actually fell on "bad" luck. I am of the opinion that for the most part, you make your own luck. I see people all the time that everyone assumes they got lucky, the fact is that they have been making good decisions (that required sacrifice!) for years and it has finally paid off. Yes some people do get lucky but it is far and few between, and if often has to do with how lucky you are to get rich parents! It always amazes me the people who think that you need a 6 figure income to get rich, or the people who think the only way to get there is to win the lottery! Hey if you really think becoming rich will make you happy, it is really simple, not easy but simple.

Matt...
I didn't look at your profile. When you mentioned "my clients", I figured you must be in the banking industry.
Matt, I think you are a great guy, but we sure do have differing philosophy about debt.
I am one of those very conservative, better-safe-than-sorry types. I am all for making money, but not by borrowing (for the most part).
Interesting discussion.
Clove

I have often heard of him, but never have listened or read his work. I just did a little research courtisy of Wikipedia and this is what I have to say about him:

I think most if his advice is very sound and prudent. He is obviously very risk adverse, probably due to his personal experience. His advice is probably especially appropriate for people who are "debt addicts" who, just like an alcoholic, need to quit now and never borrow another dollar.

That being said there are some things about Dave's story that probably don't pass the old sniff test.

1. "He had a real estate portfolio worth 4 million" This most likely was the asset side of his balance sheet, the liability side was probably about the same. Meaning he probably had very little net worth. This is a common problem among over zealous real estate investors.

2. "The bank called 1.5 million worth of short term notes" If he had had these notes secured by real estate with any equity he should have been able to sell the property and pay out the notes, leaving him with 2.5 million worth of RE.

3. "He declared bankruptcy and lost it all" Yes he may have had to sell all of the real estate, but most big time real estate investors have bullet proofed their personal wealth with use of LLC's and limited partnerships. He most likely had most of his personal net worth tied up in his primary residence, in his wife's name, ect. He probably ended up with a net worth similar or perhaps even better than he started with.

These are just speculations based on personal experience and may not be true, BUT, there is almost always more to the story.

As I have addressed comments, I think I have come to a better realization of the point I was trying to make. That being that there are many people out there that are not "debt addicts" and are very good managers of money. These people could probably afford to take a little more risk and acheive a better return on their money by using leverage wisely. And perhaps there is such thing as being TOO risk adverse on a spectrum that varies from burying your cash in the back yard to using every paycheck to buy lotto tickets. And I think many homesteaders are pretty close to the back yard side of things and could benefit greatly by taking a little bit of calculated risk. It is quite funny how many people claim to be debt adverse, as in they won't borrow a dime for stocks, but will proceed to invest huge sums in something like EMUS!

Cool, I'm glad you are enjoying it, I usually start these types of threads to talk about my work that my local family and friends couldn't stand to hear another word about!

The problem with that is if something had changed those descions might not have looked so good
Thus yes they are lucky
The simplest way to think is what if some nut had pushed the red button during the cold war and 1 JUST one nuke had wiped out where they were invested? then all the guys that had invested in gold would have been the one s making the "right" choises

It much easyer to see the past verses the future and just the recent past at that. I can envision some 14th centry land speculater in one of the cliff dewlling ."It will ALWAYS be a great investment Hunny it has a great veiw and its on the best path....."

Something Ive seen here in the real estate market there are jumps.If you invest just before the jump you are wise if you invest just after your a chump. If you should manage to invest a few times just befor these jumps you will be wealty.
Did most of the Farmers around here I know get rich in land by studying the land market and knowing when the jumps would come? Nope they got lucky .Life worked out the timing for them. They never say that ,they see themselves as self made men making wise choises but when you follow the story down its often just luck

I think a lot of people do learn, eventually. (all us debt addicts) We sold two residences to cover our consumer debt and stay ahead of credit cards and car loans, and then knuckled down and paid the rest off. Our only debt now is our home. However - it FEELS SO GOOD to have gotten rid of all that, we'd like to go further and be mortgage free as well. We don't owe on credit cards, vehicles or anything but our mortgage. This feels so great - I can't even IMAGINE what it would feel like to not have the biggest note of all paid in full, not to mention the room in our monthly budget that would create.

We are in the process of getting a second mortgage to finish our home and sell it. The market has risen dramatically in the five years we've owned our current home and even pulling a second we will only owe about a third of the value of our home. The market is expected to rise ten to twelve percent this year for our area, covering the entire cost of construction. So - perhaps this is the 'good debt' risk of which you speak?

niki

I've managed many apartment houses (duplexes to 6 family houses), the one thing they all have in common is the owners would sell in a heartbeat if they could make a profit. The 6 family houses did better, but with a duplex you get a deadbeat that you have to evict and now that's 2 or 3 years profit gone in a few months time. Other things pop up like people ruining your septic system or ignoring a small problem until it gets really bad. They aren't going to stiff you when times are good either I can guarantee that, it will be when you can least afford it. These were houses in good neighborhoods too. In theory a person could become wealthy by accumulating rental hosues, more likely is the scenario of stress, frustration, and huge debt. Look at guys like Robert Allen, the most famous real estate wealth maker of all. He does seminars and sells books to make money. Ask yourself why. I believe that in order to make money with rentals a person needs to own an apartment complex with at least 30 units, that way a few can go empty and cash flow is still good.

Dishonesty can enable anything to happen but I don't think any bank will let you borrow money to buy stocks and bonds....

debt?

the devil dances in empty pockets. i don't buy anything i can"t pay for. not anything.

pax
t.f.

I agree

Real estate historically tracks inflation. Robert Shiller (Yale Economist) wrote a book a few years ago about the housing bubble. Up until the late 1990's and back as far as the 1880's real estate tracked inflation. Since the 1990's real estate has risen much faster than inflation and there is a good chance that prices will fall back to the historic inflation rate.

http://static.flickr.com/17/21708038_66817b8236.jpg

Notice the spread between home prices and rental prices
http://myweb.lmu.edu/jdevine/talks/S...s/image011.jpg

http://www.rntl.net/images/homevalues.jpg

Consumers are using Home Equity Loans to fund personal spending. Eventually the easy credit will dry up and consumers will be forced to cut spending. Not only will they have less money to spend when they stop borrowing, they have to start paying it back. Double wammy! Less spending will cause much higher unemployment.
http://www.writingshop.ws/assets/ima...ndingSpree.jpg

Its highly likely that when they have to start paying off thier debt, a lot of people will opt to sell thier real estate since its probably unrealistic that thier wages will grow substantially. When lots of homes go on the market it will depress the housing market causes prices to fall. Some will get in trouble because they bought near the top of the market, or cashed out much of their home equity leaving the more debt then the value they can get on the market.

This is why its a bad time to have excessive debt. When the economy does fall and unemployment rises, wages will likely fall making it much more difficult to people to service there debt and pay bills. If you have any CC or high interest debt, this would be a good opportunately to pay it down or completely pay it off. Also make sure you have a "Fixed" mortgage rate on your property. As mortgage default rates rise, lenders will demand higher interest rates in order to compensate for the increased default risks. It does't matter what your credit rating is, because national and international rates will rise as less investor would be willing to purchase mortgage backed securities.

FWIW: There is a chance that the gov't will flood the market with credit in order to prevent a depression, but you would be gambling with your future if you choose not to paydown debt. There may be circumstances that prevent them from flooding the market with credit.

old worn down slums.

I made sure that I felt comfortable making all repairs though.

The same thing goes in Italy.

I am curious how a 99 year mortgage could possibly work. Even a 50year mortgage doesnt reduce monthly payments much below those of a 30 year mortgage due to all the extra interest you have to pay before truly paying down any principal.

It would mean much slower economic growth but I am not so sure it wouldnt be better to have a hard currency, no debt society. Much less waste and frivolous use of resources.

Few understand that credit is a tool used to build rather than a crutch to prop ones lifestyle, The majority who fail to see credit as a tool also fail to realize that shovels, hammers, saws and guns and explosives are also tools for various jobs.

This combination of flawed view leaves many in dire financial straits.

Credit / debt is a very serious topic.

Each time that a person goes into debt, it should be well considered and thought through.

Each time that I bought an apartment building, I was able to do so with zero-down payment. I only needed to come up with closing costs. Each time the units were already filled, so I had collected one month's rent before the first mortgage payment fell due.

Each property that we have done, the rental income was far more than the mortgage payment. And each time, my family moved into the building and we resided in it as our primary residence for the next two years.

Without the availability of credit, I would have never been able to do that.

:)

debt is an important tool but you have to have the cash flow to service the debt ,with that in mind i am at my limit .I have to maintain a reserve of funds for the lean times that periodicly hit otherwise i do not feel secure other people i know go all the way into debt making it in my opinion far to easy to get into trouble ,debt can be justified by calculating payback and to as my collage acounting profesor always poited out ALL the aspects of the situation even the hidden ones as the inflation rate over the years of the project that often exagerate the true payback .historicaly real intrest remains around 2% with an added adjustment for inflation being the case i asume intrest raits will be rising rapidly soon . while some older folks have seen a drastic increase in thier property values remember when we adjust for the inflation over the long term some show a decrease in value . if u look at the tables a 500$ a month motgage today would have been about 20$ a month in 1913 . the area i live in has shown rapid suburban growth in say 1960 you could have purchased all the land u wanted for less than 100 an acer and depending on which acer u bought (location.....location) it would be worth 3,000or 20,000 or much more ive known several people who rented land to farm in thier youth rather than purchase it outright because it would not work out on paper oposite side of the gamble and today thier former fields are some of the most expensive realestate around they just helped the owners pay for it till it was time to develope as for new vehicles we always had older used ones then we had a spell where i could have bought new for what repairs were hitting us for . the shock is our new van cost less than the used ones we saw on the lots used with 50-60,000 miles! the difference was we didnt get the TOYS ,sterioes special rims special seats ect.........most of the debt out there today isnt the kind we are discusing its for vacations ,huge wedding parties ,boats and all the toys

I see no mention as to the value or uses of negative cash flow to offset taxes or shield profits on rentals

Neither a Lender nor a Borrower be!!
 

Used to be wisdom in the old saying "Neither a lender nor a borrower be".

Self sufficiency would suggest no debt.

Unfortunately, the system encourages debt. They make it seem you gotta buy this and you gotta buy that and you gotta do it now and we will sell it to you for only $$ a month and only #% interest. Buy now/Pay later.

I don't see how debt can be considered "GOOD". I see how people can USE debt to obtain something they might not otherwise afford, and then use it to their advantage. But whether that could be classified as "GOOD" or not is a matter of opinion. Some people consider modern transportation to be "GOOD", but is it really? Especially when you consider the whole picture of all that is involved???

Who's to say? To some, in order to buy something, they might consider debt to be good. To some others, they absolutely refuse to go into debt for any reason. And contrary to popular belief, the majority of the very wealthy did not get that way by going into debt. They got that way by getting out of debt.

No, you do not pay $700 in interest the second year! Typically interest is paid on the principal and for every payment you make the principal decreases. So during the second year you will be paying less in interest than you did during the first year. And so on and so on.

The key is to continue earning more in interest than you are paying in interest. Equally important is not only to continue earning interest on the full original loan amount, but also to continue earning interest on the interest earned.

Ok I'm just a bit confused and maybe I'm missing something here. I am known to have the occassional brain fart but the way I reading the text that I've quoted is that on some regular basis the going rate of the property & any buildings that I have a mortgage on is looked at by the lender. If the value has remained constant or increased my repayment amount and length of time remains the same BUT if by chance the value has gone down I owe the lender the difference on the value or an immediate payoff of the mortgage?

Assuming that I did read correctly I have the following questions. How often is the value re-calculated? Is it a generally done as a periodical re-evaluation or is it after a fixed amount of time such as weekly, monthly, yearly? If it is a fixed time what is considered typical and what should be considered a red flag for a borrower?

Assuming that the lender wants to continue the current relationship with the borrower is the borrower notified that the value has decreased and the repayment terms immediatly changed or is it typical for additional charges to be added to the end of the mortgage term?

I am currently a renter and am looking to be an owner within the next 3 years. I really would like to purchase property that suits my needs and not necessarily have to consider value stability/increase. If I have to keep a considerable amount of money available in case of a downward trend in property values that will have a serious impact on the amount of mortgage debt that I would feel comfortable carrying and may make it impossible for me to find a non preditory lender that would be willing to pick up a small mortgage.

To me the only tolerable debt is for land (as its really the only sure investment) To a lesser extent I can understand debt for things you truly need to get started (house, transportation, tractor, whatever else).

I guess I'm to the point where I just don't want any more bills. I don't mind working to pay the mortage on a piece of dirt but I sure hate to sell my life for electricity, gas, insurance, or a vehicle that will fall into disrepair before the note is paid in full.

But thats just me. I'm not into consumerism anymore and couldn't tell ya the last time I bought something I didn't really need. Bought my last pair of shoes for $7.99 at wallyworld (don't get me started) about 2 years ago. Thats been my biggest splurge.

You read right, unfortunately WHAT you read was wrong. As long as you continue to make your scheduled payments on time, pay your property taxes and maintain homeonwners insurance, the bank doesn't give a rat's behind! :nono:

The bank looks at Loan:Value ration to QUALIFY you before issuing you a loan. After the loan has closed, you keep up your payments, taxes, insurance and there will be no problem. I have never had a mortgage that required me to maintain a certain loan:value ratio. The post you quoted was posted by someone who is confused and quite probably has never had a mortgage. :rolleyes:

I bought my 1st house on Xmas Eve, 1981. Right at the peak of a real estate bubble. I had no idea what I was doing and paid asking price. At the time, FHA loans wer over 15% interest, I had to take out a 1st mortgage on the house and a 2nd for the down payment. Basically, I went into the deal with zero equity. 6 months later, the bubble burst and my property lost 1/3 of its value. The bank didn't call in my mortgage because the value dropped on my house. I kept making my payments, taxes, kept the insurance paid and I stayed in that house for 23 years, after which time I sold it for TEN TIMES what I paid for it.

As Matt said in a rebuttal to the post you quoted--banks don't want to foreclose on a property. It costs them money. They aren't in the real estate business. They are in the lending business. They absolute worst case scenario would be you buy mortgage insurance until your LTV ratio is back down to 80%,:cool:

Even if you are able to buy your home/business outright, you still owe property tax...in my neighborhood, my property tax on my 3.5 acre farmette was 1,200.- now it is $5,000-
Elderly folks on fixed incomes are in trouble all over this country in the areas that become Bedroom Communities for cities 1-2 hours away.

Banks can make money on foreclosures. These days banks package mortgages together and sell mortgage backed securities. They make money servicing the debt not on the loan interest. If the borrower can no longer make good on his mortgage, the bank can foreclosure and collect foreclosure fees on the process. If the bank can't collect any services fees because the borrower is not paying its better for them to foreclose instead of just sitting it out. If the home is sold for less than the amount left in the mortgage, its the bond holders and the borrower that are stuck with the loss. This is why so many banks push as many loans as they could. Its not their money, its OPM (Other Peoples money).

Read the whole post. LvDemWings was concerned because someone posted that if your house value goes down then you will have to immediately come up with cash to bring the Loan to value ratio back to what it was when you qualified for the loan.

The original post that concerned LvDemWings inferred that banks are looking for ways to foreclose on people who are making their payments as scheduled. It was not about the case of people being in default of thier mortgage contract by not making their payments.

As Matt is a banker and we don't know what you do, I am inclined to believe someone who actually works in the industry. Especially when it echoes what I hear from people I know in the banking, real estate and real estate law businesses.