Author Topic: Real Estate's solution to FIRE is Debt. How is this feasible long-term?  (Read 15763 times)

arebelspy

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #50 on: August 15, 2014, 05:50:18 PM »
Its standard political maneuvering when one is losing an argument based on facts.

Oh?  Is that why you use phrases like "your idol Buffet" (?) and ignoring my actual commenting on your definitions, being unwilling to actually discuss leverage as speculating or not?

You seem to favor something like 75%

What makes you say that?  You seem to just be making things up out of thin air.  My LTV is about 33%.  I don't favor any particular amount.  Sometimes 0% is the right amount.  How much leverage to use is highly dependent on the person, situation, etc.

You state that building a 401k while paying a mortgage is usual, but the idea is unpopular enough that it needs to be subsidized on both ends through tax incentives.

If it's incentivized, multiple ways, isn't that more proof that it's usual, not unusual?

Pulling out a heloc to buy index funds seems even less palatable to the average joe.  With this being the case, you're more of a speculator than an investor.

Yet again, making things up.  I don't have a HELOC, and never have.

/eyeroll

You seem to equate debt with risk, and that no debt equals no risk. This just isn't the case.

+1.
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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #51 on: August 15, 2014, 07:12:23 PM »
I have rentals in Phoenix.  Some are leveraged, some are not.  I survived the crash without losing a single property.  Yes, a couple dropped in value below the remaining balance of the mortgage, but since these are non-callable loans and my tenants largely continued to make their rent payments, I hardly noticed.  I PLAN for a 20-25 percent decrease in rents and 20 percent vacancy.  If I can survive that for a few years, I will likely be just fine.  In fact, when the market dropped by 65 percent, I backed up the truck and bought 4 more houses.

The fact that mortgages and 401k's have tax benefits is the federal government's way to encourage home ownership and retirement savings.  Tax incentives for business investment are no different.  What's "enormously unpopular" is not being able to afford to buy a house or save for retirement.  See if you can get re-elected if you remove the subsidies.

Debt has risk, but the risk is mitigated if it's managed wisely.  People like me scavenge the remains when it's not.  The world goes on.

fixer-upper

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #52 on: August 17, 2014, 12:39:03 PM »
Fixer-upper.

RE investment is not how you perceive it. For example, the 1% rule of thumb*, or 2 %, have nothing to do with how you finance the property. It merely refers to the ratio of price to rent. Assuming 50% of rent goes to expenses,  the 2% 'rule' gives a return on investment of 12% per annum.

lets take an example. I own a 100k house that rents for $2000  a month. Expenses ( property tax, insurance, maintenance) are $1000 a month. Ignoring vacancies, thats 12k per year pretax cashflow.

I have 1 property. So there is risk with concentrating all my equity in one house. Look what happens if I leverage.

With 20% down I instead buy 5 of these houses, all the same, for $500k. I pay 5% interest, fixed rate. That's 20k a year in interest payments. But I have 60k in cashflow (5 12k). My net cashflow is now 48k per year! Plus another 6k in principal repayments.

leverage has a powerful effect if the interest rate is a lot lower than your roi.

But, one might say, what if the market collapses like in 2008? A 20% drop means you've ' lost' all your equity! Yes, thats true, but these are fixed rate mortgages,  so they can't call them. But I still own the properties and I'm still getting 60k of cash in rent, and can still pay the mortgages. In fact, thanks to the leverage, I have 5 houses, so even if vacancies go up, I'm in good shape.

Meanwhile, with 1 house, I would be ok on equity. Lost only 20k. But im very vulnerable to vacancy risk, as I still have to pay tax and insurances. If I can't pay those I can loose the house just as much to tax forclosure.

You seem to equate debt with risk, and that no debt equals no risk. This just isn't the case.

* rule is a house should rent for 2% of purchase price. Or 1%. Or inbetween. But not lower.

Your argument has some validity, but it also has a hole in it.  If rent prices decline along with the property value, you're screwed with the levered properties.  For the most part, rents are guaranteed by subsidies, but if those subsidies end, or there's a cutback in student loans, your neighborhood turns into a riot zone, the government actually stops illegal immigration, etc., you're at risk of having your monthly income be less than your payments.

I agree that no investment is risk free and that diversification is good, but debt will always be a two-edged sword.  If this wasn't the case, companies with a high DTI wouldn't trade at a discount to those with low debt loads.

Your monthly risk of default on levered properties may be quite low, but the cumulative risk of holding debt for decades is much higher.  I look at the cumulative risk, as I've been alive long enough to know that change, although gradual, is inevitable.

* a second hole in your argument is the necessity of paying insurance on an unlevered property.  Not only is insurance optional, it's also cheaper since you don't need to pay for full replacement value to satisfy lending requirements.

fixer-upper

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #53 on: August 17, 2014, 02:37:00 PM »
Its standard political maneuvering when one is losing an argument based on facts.

Oh?  Is that why you use phrases like "your idol Buffet" (?) and ignoring my actual commenting on your definitions, being unwilling to actually discuss leverage as speculating or not?

You seem to idolize Buffet, but differ in your investment strategies.  Should we listen to your praise of the man or watch your actions?

Quote
You seem to favor something like 75%

What makes you say that?  You seem to just be making things up out of thin air.  My LTV is about 33%.  I don't favor any particular amount.  Sometimes 0% is the right amount.  How much leverage to use is highly dependent on the person, situation, etc.

Earlier in the thread you mentioned borrowing with 25% down while using the rest to hold stocks.  Hence, the 75% I "made up out of thin air"

Quote
You state that building a 401k while paying a mortgage is usual, but the idea is unpopular enough that it needs to be subsidized on both ends through tax incentives.

If it's incentivized, multiple ways, isn't that more proof that it's usual, not unusual?

Electric cars and solar panels are subsidized multiple ways, but they're far from usual.  You may want to rethink your logic.

Quote
Pulling out a heloc to buy index funds seems even less palatable to the average joe.  With this being the case, you're more of a speculator than an investor.

Yet again, making things up.  I don't have a HELOC, and never have.

/eyeroll

Nitpicking HELOC vs mortgage is a bit of a straw man.

arebelspy

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #54 on: August 17, 2014, 02:46:10 PM »
Your argument has some validity, but it also has a hole in it.  If rent prices decline along with the property value, you're screwed with the levered properties.

Well yes, rent prices might decline, but in real life, they don't typically decline enough to matter.  For example, in Vegas when the RE crash happened prices tanked 60%.  Median rents, however, dropped from 1000 to 950/mo.  A 5% decline.  And vacancies actually decreased.

So being leveraged didn't hurt you too much (not much more than it hurt the unleveraged person), if you were cash flow positive.  Naturally the vast majority of the people who lost their homes were cash flow negative, because they were counting on appreciation, and I think nearly everyone agrees that is speculation.

For the most part, rents are guaranteed by subsidies, but if those subsidies end, or there's a cutback in student loans, your neighborhood turns into a riot zone, the government actually stops illegal immigration, etc., you're at risk of having your monthly income be less than your payments.

Not if you bought right.  My median rent is over 1000 versus a median P&I of under 300.  There is no reasonably rental decline that will put my monthly income less than my payments, short of a disaster that would also wipe out the unleveraged person.

I agree that no investment is risk free and that diversification is good, but debt will always be a two-edged sword.  If this wasn't the case, companies with a high DTI wouldn't trade at a discount to those with low debt loads.

Your monthly risk of default on levered properties may be quite low, but the cumulative risk of holding debt for decades is much higher.  I look at the cumulative risk, as I've been alive long enough to know that change, although gradual, is inevitable.

Naturally it does add more risk.  That doesn't automatically make it "speculation" and not "investing."  Unless your new definition of speculation is an investment with any risk.

* a second hole in your argument is the necessity of paying insurance on an unlevered property.  Not only is insurance optional, it's also cheaper since you don't need to pay for full replacement value to satisfy lending requirements.

There's many factors involved in the cost of insurance that will have a larger impact than simply insuring it for a little less because you don't have to worry about replacement cost, IME.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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arebelspy

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #55 on: August 17, 2014, 02:51:34 PM »
Its standard political maneuvering when one is losing an argument based on facts.

Oh?  Is that why you use phrases like "your idol Buffet" (?) and ignoring my actual commenting on your definitions, being unwilling to actually discuss leverage as speculating or not?

You seem to idolize Buffet, but differ in your investment strategies.  Should we listen to your praise of the man or watch your actions?

Neither.  I don't know why you're so obsessed with me, but what you should do is think for yourself and have a rational discussion on the merits of the various ways to invest.

Quote
You seem to favor something like 75%

What makes you say that?  You seem to just be making things up out of thin air.  My LTV is about 33%.  I don't favor any particular amount.  Sometimes 0% is the right amount.  How much leverage to use is highly dependent on the person, situation, etc.

Earlier in the thread you mentioned borrowing with 25% down while using the rest to hold stocks.  Hence, the 75% I "made up out of thin air"

Once again, it seems like you're just making stuff up.  The only time I mentioned 25% was in a discussion of saving up to buy in cash versus using leverage.  There was no holding stocks in that scenario.

Quote
You state that building a 401k while paying a mortgage is usual, but the idea is unpopular enough that it needs to be subsidized on both ends through tax incentives.

If it's incentivized, multiple ways, isn't that more proof that it's usual, not unusual?

Electric cars and solar panels are subsidized multiple ways, but they're far from usual.  You may want to rethink your logic.

My definition of usual is that more people do it than not.  You were the one that brought up subsidies, and yes, the goal of subsidies is to incentivize something to make it more used.

In this case, many more people invest in a 401k while having a mortgage than while owning a house free and clear, thus it would fall under "usual".

Quote
Pulling out a heloc to buy index funds seems even less palatable to the average joe.  With this being the case, you're more of a speculator than an investor.

Yet again, making things up.  I don't have a HELOC, and never have.

/eyeroll

Nitpicking HELOC vs mortgage is a bit of a straw man.

I don't mean to nit pick, there is a big difference.  Once again: someone investing while holding a mortgage isn't by definition, speculating.  They can be investing.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

fixer-upper

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #56 on: August 17, 2014, 04:17:30 PM »
Your argument has some validity, but it also has a hole in it.  If rent prices decline along with the property value, you're screwed with the levered properties.

Well yes, rent prices might decline, but in real life, they don't typically decline enough to matter.  For example, in Vegas when the RE crash happened prices tanked 60%.  Median rents, however, dropped from 1000 to 950/mo.  A 5% decline.  And vacancies actually decreased.

For a few years, everybody knew that houses always increase in price.  You believe rents always go up.  One could speculate that you're right, but there's no more assurance in your words than those of the first group.

Going back to my original premise, you're using borrowed money to bet on a movement in one direction, or speculating on margin. 

arebelspy

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #57 on: August 17, 2014, 04:25:24 PM »
For a few years, everybody knew that houses always increase in price.  You believe rents always go up.  One could speculate that you're right, but there's no more assurance in your words than those of the first group.

No.  I don't believe that.  Don't put words in my mouth.  In fact, you quoted a post where I said rents went down.  How could you claim I believe that they always go up?  That's quite disingenuous.

Going back to my original premise, you're using borrowed money to bet on a movement in one direction, or speculating on margin.

No, I'm not.  I've repeatedly given examples where even if the market moved down, you can still come out ahead investing with leverage due to cash flow.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

waltworks

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #58 on: August 17, 2014, 04:51:47 PM »
When the new floating free-to-everyone Google pleasuredomes are the only escape from the carnivorous GMO corn, you'll be sorry!

Speculator.

-W

For a few years, everybody knew that houses always increase in price.  You believe rents always go up.  One could speculate that you're right, but there's no more assurance in your words than those of the first group.

No.  I don't believe that.  Don't put words in my mouth.  In fact, you quoted a post where I said rents went down.  How could you claim I believe that they always go up?  That's quite disingenuous.

Going back to my original premise, you're using borrowed money to bet on a movement in one direction, or speculating on margin.

No, I'm not.  I've repeatedly given examples where even if the market moved down, you can still come out ahead investing with leverage due to cash flow.

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #59 on: August 17, 2014, 05:55:04 PM »
I have owned rentals for almost 20 years.  Rents go up, rents go down, rents stagnate.  Over the long term, rents trend up.  Same with house prices.  Same with stocks.  If the world shifts on its axis, we are all screwed.  In the meantime, I will own leveraged properties, leveraged with non-callable loans, where leverage makes sense.  I can hang on a really, really long time if things go south.  Meanwhile, equity investors that lose their jobs will be dumping stocks to eat.  Look at all the people that lost their jobs, their houses, and emptied their retirement accounts to survive in the Great Recession.  My risk is much lower than theirs turned out to be.

fixer-upper

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #60 on: August 17, 2014, 10:13:49 PM »
For a few years, everybody knew that houses always increase in price.  You believe rents always go up.  One could speculate that you're right, but there's no more assurance in your words than those of the first group.

No.  I don't believe that.  Don't put words in my mouth.  In fact, you quoted a post where I said rents went down.  How could you claim I believe that they always go up?  That's quite disingenuous.

Again with the nitpicking specific phrases?  Ok, here's what you said:
Quote
Well yes, rent prices might decline, but in real life, they don't typically decline enough to matter.

The essence of which is rents don't decline.  You're looking for movement flat or in one direction, which is still speculation.

Going back to my original premise, you're using borrowed money to bet on a movement in one direction, or speculating on margin.

No, I'm not.  I've repeatedly given examples where even if the market moved down, you can still come out ahead investing with leverage due to cash flow.
.

Is it just yourself you're trying to delude, or the entire forum?  You're counting on rents not to decline (more than slightly), and are in favor of holding debt to bet in the bourse (without an apparent hedge strategy).  You can come out ahead through speculation as you've described, but it's speculation nonetheless.

I really don't give a shit one way or the other how you invest or speculate, but you do seem to have issues defining the words for yourself.  Making firm definitions for yourself instead of trying to worm your way into being an "investor" would be a good start.  If you can't put it in writing without some hack picking apart your argument, you don't have a very solid understanding of the subject.
« Last Edit: August 17, 2014, 10:17:09 PM by fixer-upper »

arebelspy

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #61 on: August 17, 2014, 11:07:17 PM »
You're counting on rents not to decline (more than slightly)

No, I'm not.  Like I said:
Quote
My median rent is over 1000 versus a median P&I of under 300.  There is no reasonably rental decline that will put my monthly income less than my payments, short of a disaster that would also wipe out the unleveraged person.

My rents could cut in half and I'd be fine.  Oh, and like I mentioned, I'm at 33% LTV, so all my free and clear properties would help cover any issues as well.  How exactly is that speculating?

I really don't give a shit one way or the other how you invest or speculate, but you do seem to have issues defining the words for yourself.  Making firm definitions for yourself instead of trying to worm your way into being an "investor" would be a good start.  If you can't put it in writing without some hack picking apart your argument, you don't have a very solid understanding of the subject.

This reminds me, I do have to say thanks for the laughs.  I've enjoyed it.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

fixer-upper

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #62 on: August 26, 2014, 08:55:13 PM »
You're counting on rents not to decline (more than slightly)

No, I'm not.  Like I said:
Quote
My median rent is over 1000 versus a median P&I of under 300.  There is no reasonably rental decline that will put my monthly income less than my payments, short of a disaster that would also wipe out the unleveraged person.

My rents could cut in half and I'd be fine.  Oh, and like I mentioned, I'm at 33% LTV, so all my free and clear properties would help cover any issues as well.  How exactly is that speculating?

If you aren't making an effort to let them pay themselves down, and intentionally taking out leverage to maximize profit under your assumption that rents normally move up, you're speculating on margin.  You may be a genius, or not.

With the numbers you posted, whether you would be considered a slumlord could be a good topic for debate.

I really don't give a shit one way or the other how you invest or speculate, but you do seem to have issues defining the words for yourself.  Making firm definitions for yourself instead of trying to worm your way into being an "investor" would be a good start.  If you can't put it in writing without some hack picking apart your argument, you don't have a very solid understanding of the subject.

This reminds me, I do have to say thanks for the laughs.  I've enjoyed it.

I notice you still haven't posted your own definition of the difference between speculating and investing.  Perhaps ego is getting in your way?
« Last Edit: August 26, 2014, 08:57:28 PM by fixer-upper »

arebelspy

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #63 on: August 26, 2014, 09:42:05 PM »
You're counting on rents not to decline (more than slightly)

No, I'm not.  Like I said:
Quote
My median rent is over 1000 versus a median P&I of under 300.  There is no reasonably rental decline that will put my monthly income less than my payments, short of a disaster that would also wipe out the unleveraged person.

My rents could cut in half and I'd be fine.  Oh, and like I mentioned, I'm at 33% LTV, so all my free and clear properties would help cover any issues as well.  How exactly is that speculating?

If you aren't making an effort to let them pay themselves down, and intentionally taking out leverage to maximize profit under your assumption that rents normally move up, you're speculating on margin.  You may be a genius, or not.

With the numbers you posted, whether you would be considered a slumlord could be a good topic for debate.

The only relevant number I posted is that my rent average is 1000.  Is that typically "slumlord" territory?  What numbers did I post that make you question that I am?  Regardless, most of my tenants thank me for being the best landlord they've ever had.  Not sure what numbers have to do with that.

I really don't give a shit one way or the other how you invest or speculate, but you do seem to have issues defining the words for yourself.  Making firm definitions for yourself instead of trying to worm your way into being an "investor" would be a good start.  If you can't put it in writing without some hack picking apart your argument, you don't have a very solid understanding of the subject.

This reminds me, I do have to say thanks for the laughs.  I've enjoyed it.

I notice you still haven't posted your own definition of the difference between speculating and investing. 

My definition of the difference was never in question.  Your definition of "any use of leverage is speculation, and can never be investing" is what was, and every subsequent definition you've posted has been shown to not match that first definition.

Perhaps ego is getting in your way?

Ego gets in everyone's way, all the time.

You seem to be quite hostile. I'm not sure why that is, other than that you seem upset each time you make up something and I call you on it (and then you make up something new).

Relax dude, we're here to help each other and learn, not win some Internet arguing contest.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

fixer-upper

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #64 on: September 01, 2014, 12:18:26 AM »
You're counting on rents not to decline (more than slightly)

No, I'm not.  Like I said:
Quote
My median rent is over 1000 versus a median P&I of under 300.  There is no reasonably rental decline that will put my monthly income less than my payments, short of a disaster that would also wipe out the unleveraged person.

My rents could cut in half and I'd be fine.  Oh, and like I mentioned, I'm at 33% LTV, so all my free and clear properties would help cover any issues as well.  How exactly is that speculating?

If you aren't making an effort to let them pay themselves down, and intentionally taking out leverage to maximize profit under your assumption that rents normally move up, you're speculating on margin.  You may be a genius, or not.

With the numbers you posted, whether you would be considered a slumlord could be a good topic for debate.

The only relevant number I posted is that my rent average is 1000.  Is that typically "slumlord" territory?  What numbers did I post that make you question that I am?  Regardless, most of my tenants thank me for being the best landlord they've ever had.  Not sure what numbers have to do with that.

Here's what you actually said:
Quote
My median rent is over 1000 versus a median P&I of under 300

It's the second half of your sentence which leads me to wonder where someone would wander into being a slumlord. 

I notice that although you accuse me of being "hostile", you still haven't proposed definitions of investor versus speculator which would show your assumptions to be valid.  Much like the term slumlord, people are hesitant to accept how others may view them.  You may think you're a just a savvy investor, but how many slumlords think likewise?  Similarly, how many speculators view themselves as investors? 

If you can't define it, you can't measure it.  If you can't measure it, your opinion is worth as much as the next idiot.

If you can't accept the image you portray to others (and cannot define what you are for yourself), perhaps the hostility you're perceiving is endogenous rather than exogenous.
« Last Edit: September 01, 2014, 12:48:55 AM by fixer-upper »

TomTX

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #65 on: September 01, 2014, 05:56:25 AM »

Is it just yourself you're trying to delude, or the entire forum?  You're counting on rents not to decline (more than slightly), and are in favor of holding debt to bet in the bourse (without an apparent hedge strategy).  You can come out ahead through speculation as you've described, but it's speculation nonetheless.

Generally speaking: Rents are less volatile than stocks. Rents are less volatile than house prices. Rents are less volatile than bonds. Rents are less volatile than commodities.

Frankly, one can pretty easily make the argument that properly leveraged real estate can be less risky, by investing in more properties. The example was given further up the thread.

Maybe it's the 100% ownership investor who is doing more speculating.

Quote
I really don't give a shit one way or the other how you invest or speculate, but you do seem to have issues defining the words for yourself.  Making firm definitions for yourself instead of trying to worm your way into being an "investor" would be a good start.  If you can't put it in writing without some hack picking apart your argument, you don't have a very solid understanding of the subject.

Apparently you do "give a shit" as you keep up with the derogatory attacks ("worm your way" " 'investor' " "you don't have a very solid understanding") rather than actually focusing on the topic at hand.

As a bonus, you have completely failed to pick apart the argument, by not focusing on theargument.

I'm wondering if we should just write this off as trolling.

waltworks

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #66 on: September 01, 2014, 08:48:24 AM »
I vote trolling. Lots of reasonable people have tried to reason with this person and given up. I'm amazing A-Spy is still replying.

Since the OP's questions were answered a while ago, maybe it's time to lock?

-W

arebelspy

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Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
« Reply #67 on: September 01, 2014, 10:08:30 AM »
I'm wondering if we should just write this off as trolling.
I vote trolling.

Yeah, I always try to give someone the benefit of the doubt, but it does appear that way more and more.  Too bad.

I'm amazing A-Spy is still replying.

Yeah.  I don't have any illusions about changing FU's mind, but maybe someone else will get something out of it. That's why I try and reason with the crazy, because someone else may be reading and if the crazy is unaddressed, they might go "yeah, that sounds reasonable."

Since the OP's questions were answered a while ago, maybe it's time to lock?

Yeah, I'm hesitant to lock threads unless they get real egregious, because someone else may come along and have a question or input.

But I guess it is time to stop replying to FU.
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