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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: Ethernet on July 12, 2014, 10:23:29 PM

Title: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Ethernet on July 12, 2014, 10:23:29 PM
I'm not quite sure how to word this. I'll likely have to clarify in the responses. Please call me out on any holes in my post.

I've been browsing through the Real Estate forums here on the MMM, as well the BiggerPockets site as a whole. While many on BP do not have the same goals for retirement as us, the end is essentially the same - To make substantial passive income and be able to quit the day job. The problem I encounter with this, however, is that often you must undertake a substantial amount of debt in order to achieve said passive income.

To expand, most real estate plans utilize a 30 year mortgage in order to meet the requirements set by the 1% rule, as well as the 50/50 rule. However, as mustachians, how is this advisable, especially when you start looking into real estate empires with tens of hundreds of properties? Even when affordable, why is it that many chose to take the 30 year loan over the 15 year loan, when the amount of interest paid over time on the property is considered substantially more? Are you not losing more money over time by doing so? Does the amount of cash that flows in every month exceed the liability of having the loan for an additional 15 years?
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: JoJoP on July 13, 2014, 09:29:22 AM
I can think of a few reasons to get a 30 year mortgage instead of a 15.  To qualify for the loan, the banks look at debt to income.  Your future rental income won't count unless you have an existing track record as a landlord.   So you might not be able to qualify for the shorter term mortgage.  Also, even if you did qualify for the larger payments required of a 15 year mortgage, you might not be comfortable committing your finances to the payment.   With the 30 year, the payments are lower, and you can easily calculate how much extra you need to commit to that monthly payment to meet your goals of an early payoff, whether that early payoff be 5 years or 25 years early. 
Other people might value that monthly income from the rental more than they value being debt free at an earlier point in time.   Another person might want to keep the finances available for the next property.

Also, most people aren't buying "tens of hundreds" of properties.   I see  a big boost in financial health with one or two rentals, and FI can be within reach with 5-15. 

But, yes, buying a lot of properties does generally entail leverage purchases.   
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: waltworks on July 13, 2014, 09:51:17 AM
Like any other debt, it will depend on your time horizon and the rates available. As a though experiment:
-You have $100k
-You can buy 1 house that rents for $1000/mo, for cash.
-Alternately you can buy 10 houses with 10% down, that are otherwise identical.
-Overhead, house prices, and rents will stay constant forever.

With 1 house, assuming 50% of gross rent goes to overhead, you're making $6k/year.

With 10 houses, assuming a 4%/30 year loan, you are making about $70/mo/house, so $700/month or $8.4k/year.

Now, that's a ridiculously simplified and extreme (no debt at all vs TONS of debt) scenario and you might not be able to get 4%/30 year loans with 10% down, but it's just intended to be illustrative of the positive effects of leverage - the 1 house/no debt is NEVER going to beat the 10 houses, even with all that debt you've piled up. The negative, of course, is that if something goes horribly wrong and you need cash, and the houses have lost value, you may be f'd. Leverage can bite you there just like it can in any other financial transaction.

Regarding the amortization period - most investors are going to want cash flow up front, because (thanks to our buddy leverage) that cash can be used to buy MORE properties. If you used 15 year loans for your 10 houses (assume, say, 3% for the rate - that's pretty close to the usual spread) you are losing $121/mo/house - so in 15 years, yeah, you own the homes free and clear - but you spent $15,600/year to do it. Over 15 years, that's $220k. So for your $320k total out of pocket, you get $5000/month cashflow in 15 years, not counting opportunity costs and such. That *might* be preferable to you than up front cash flow (which can be reinvested) but it depends on your time horizon.

-W
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: JayKay on July 13, 2014, 12:42:56 PM
Good question.  Here's my take:

Personally, I prefer the 30 fixed year rather than 15 across the board, even on my primary residence. 

The lower payment naturally builds a "financial buffer" into your investment, whereas, in the 15 year example, you are either barely able to cashflow or, even worse, forking your own money into the place.  To me, that's the scariest, having a property that's negative.

As an investor, your thinking shouldn't be "how can I minimize interest paid", but "what's the end result of this investment", because that's actually what counts.

Also, if paying interest bothers you, here's something to think about.  I've seen some numbers crunched on the 15 vs. 30 and if you pay off a 30 in 15 years, the amount of interest will be very comparable.  The only difference is the flexibility:

Let's say Person A has a 15 year and Person B has a 30.  They both fall ill, become unemployed for long time, or encounter any other type of problem.  Person B has a much better chance of coming through IMHO because his minimums are far less than Person A.   The same thinking applies to rentals.  Given a bad market, a long-term vacancy, or what-have-you, the fixed 30 gives you better survivability odds.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: rmendpara on July 13, 2014, 01:33:36 PM
I'm not quite sure how to word this. I'll likely have to clarify in the responses. Please call me out on any holes in my post.

I've been browsing through the Real Estate forums here on the MMM, as well the BiggerPockets site as a whole. While many on BP do not have the same goals for retirement as us, the end is essentially the same - To make substantial passive income and be able to quit the day job. The problem I encounter with this, however, is that often you must undertake a substantial amount of debt in order to achieve said passive income.

To expand, most real estate plans utilize a 30 year mortgage in order to meet the requirements set by the 1% rule, as well as the 50/50 rule. However, as mustachians, how is this advisable, especially when you start looking into real estate empires with tens of hundreds of properties? Even when affordable, why is it that many chose to take the 30 year loan over the 15 year loan, when the amount of interest paid over time on the property is considered substantially more? Are you not losing more money over time by doing so? Does the amount of cash that flows in every month exceed the liability of having the loan for an additional 15 years?

We all have different levels of risk tolerance, and that is the central point.

Debt is your friend, but given the events of '08-'09, we know that most people don't know how to use it properly.

If you are liquid enough to handle more debt, and have enough income to cover any shortfalls of your assets or liquidity squeeze, then debt at favorable rates will enhance your long term value.

See attached file that another poster put together to show the total value difference between a 15/30 yr mortgage. There is a very slight advantage to using a 15 yr mortgage, which gets bigger if the difference in rates is larger and when your assumed investment return increases; however, if your goal is to build up real estate wealth, time is your real constraint and the earlier you invest, the longer you have to let your tenants pay off your mortgage and more time for your property to appreciate. I hope this helps to at least introduce the topic without getting to detailed.

Play around with the numbers in the spreadsheet and you'll get a better idea of how different rates/investment returns will affect your total return.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: rmendpara on July 13, 2014, 01:34:33 PM
Sorry, here it is.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Ethernet on July 13, 2014, 06:51:33 PM
Hey all, thanks for a much needed different POV.

I guess I had my mind stuck in a different realm. It's become apparent that Real Estate is more concerned about cash flow than actual lump sums. While I don't know if I can necessarily agree with this type of financial strategy, it's definitely something that I will consider when I build my portfolio.

Thanks again for all the detailed responses.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy on August 11, 2014, 09:40:49 AM
Real estate leverage can RAPIDLY get you to FIRE.

It's a double-edged sword, however.  Hardly anyone has lost a property to foreclosure that owned it free and clear*.  ;)

Lots of people were overleveraged in 06-08 and lost a lot of property.  I'd argue, however, that was because they bought bad deals.  Anything that cash flows properly, you won't care what the paper value is.  The leverage helps you buy more, and cash flow more.  You aren't using the leverage to magnify capital gains (or losses), though it will.  That's incidental.  You're using it to gain more cash flow.


*Exceptions exist, due to other liens that can be put on a property, such as an HOA or Mechanic's Lien.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: AlexK on August 11, 2014, 10:01:22 AM
I bought all of my rental properties with cash, saved up over time. I had one house which I lived in pre-saver days which had a mortgage but that has been paid off with savings too. So you don't need to go the leverage route.

Had I used leverage to buy I could have bought more properties and be wealthier today, or I could have bought at the wrong time and be underwater. Also I don't like the hassle and demands that banks make. I would be stressed out wondering if the bank would find some tiny issue that derails the deal at the last minute, costing me earnest money. Paying cash allowed me to buy a property which was in very poor shape for super cheap, something banks won't allow. The rent-expenses from that one property is now $1000/mo.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy on August 11, 2014, 12:41:10 PM
I would be stressed out wondering if the bank would find some tiny issue that derails the deal at the last minute, costing me earnest money.

Any time you are financing, your contract should have a financing contingency - if the bank screws up the deal, you get your EMD back. So this isn't something to worry about, IMO. 

All the rest of your pros/cons are very true.  :)
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Another Reader on August 11, 2014, 01:27:37 PM

Anything that cash flows properly, you won't care what the paper value is.

I fully intend to remind you of this statement when you start talking about selling and moving to new markets with better current yields.  If it was the right property in the right market when you bought it, I will then suggest you review Warren Buffett's analysis of his own real estate investments.  You are in the business for the long term.  Transaction costs eat heavily into your profits and the bright shiny new property may be no better over time than the one you already have.

Back to the thread topic.  Leverage forces you to become more analytical and honest about your deals.  Negative leverage means money may be coming out of your pocket, not flowing in.  Your only hope for profit then is appreciation reaped at the time of sale.  Most people use real estate to generate a reliable income stream that is well sheltered from the tax man.  That means positive leverage and solid cash flow from the beginning or the plan fails.  Owning multiple properties reduces the risk of using leverage.  If you experience extended vacancy or collection losses and major rehab costs on one property, the other properties will carry you.

The utility of leverage changes over time as property yields, interest rates, and the rules for borrowing change.  Sometimes, as in the 2009-2012 period, cash gets you to the front of the line to purchase distressed properties at big discounts.  If you have properly balanced leverage and cash flow over your investing career, you will have cash on hand and be able to buy some of those deals.   

Buying "tens of hundreds" of properties with conventional mortgage financing as the OP suggests is not possible.  That's a full time business with entirely different financing sources.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: MillenialMustache on August 11, 2014, 02:37:59 PM
I think you are not looking at it the same way as I am. I own my primary residence free and clear. We just purchased our first rental home. I plan to use my income, my DH's income, and the income from the rental home to go on the mortgage. We are expecting to pay it off within three years. Then, the property will give us $1,000 a month of living expenses, with some money taken out for repairs (rent is $1,200). Times this by four or so properties and a little bit of side hustling (Ebay, adjunct instructor, etc), and we will not need to work anymore. We used our job income now to create a somewhat passive income later. Some of the people on Bigger Pockets do it differently, and turn it into a full-time job. That is not always what Mustachians are trying to do.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy on August 11, 2014, 08:54:11 PM

Anything that cash flows properly, you won't care what the paper value is.

I fully intend to remind you of this statement when you start talking about selling and moving to new markets with better current yields.  If it was the right property in the right market when you bought it, I will then suggest you review Warren Buffett's analysis of his own real estate investments.  You are in the business for the long term.  Transaction costs eat heavily into your profits and the bright shiny new property may be no better over time than the one you already have.

Yeah, I meant if the value dropped.  Naturally if it rises there may be better places for the equity.  ;)

It's a good point though, I get tempted to move equity, but keep telling myself to be patient.  I do appreciate your reminders.  :)
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Another Reader on August 11, 2014, 09:00:41 PM
Well, I mean if it rises.  Over time, markets shift, cap rates change, and then they shift again.  You don't see Mr. Buffett selling either the farm or the New York office building, do you?  Borrow some equity out if you must, but leave the cash cow alone and keep milking.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Fishingmn on August 12, 2014, 08:07:38 AM
I would be stressed out wondering if the bank would find some tiny issue that derails the deal at the last minute, costing me earnest money.

Any time you are financing, your contract should have a financing contingency - if the bank screws up the deal, you get your EMD back. So this isn't something to worry about, IMO. 

All the rest of your pros/cons are very true.  :)

The Financing Addendum may not get you the earnest money back - it depends on which boxes are checked so that's not always true (at least in my state). While you should always check the boxes that are most beneficial to the buyer some sellers will insist on options that protect them if you want to reach an agreement.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy on August 12, 2014, 08:17:06 AM
I would be stressed out wondering if the bank would find some tiny issue that derails the deal at the last minute, costing me earnest money.

Any time you are financing, your contract should have a financing contingency - if the bank screws up the deal, you get your EMD back. So this isn't something to worry about, IMO. 

All the rest of your pros/cons are very true.  :)

The Financing Addendum may not get you the earnest money back - it depends on which boxes are checked so that's not always true (at least in my state). While you should always check the boxes that are most beneficial to the buyer some sellers will insist on options that protect them if you want to reach an agreement.

Sure, absolutely, sellers may want you to waive the financing contingency completely (and all other contingencies, in hot markets).  All of that is negotiable.  I'm just saying, there's ways to protect yourself, via the contract/sales agreement, to not lose your EMD even if your financing falls though.  Whether or not you're able to utilize those ways is a different matter.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Mr Mark on August 12, 2014, 11:11:54 PM
You also can't address such a question in isolation from the rest of your stash.

ie if I have a stash of 1mill, distributed among vanguard, primary equity, real estate. If I can get super cheap non-callable loan at say 5% (often tax deductible interest, btw), and then use that money to invest in more real estate rentals (paying cash on cash of 15%) plus vanguard (assume 9% pa before tax), maybe a flip,... yet as a % of net worth its totally sustainable. I can make the interest payments, short term. We have a word for that - ka-ching.

if all I have (and even that is not much) is leveraged at 95% on dodgy rentals using credt cards and hard money, and just a few things go south, well, yeah, bankruptcy.

Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper on August 12, 2014, 11:47:24 PM
It's easier to make money buying than selling, and needing to take out a loan can make you miss opportunities for great buys.

Using the numbers above ($8400 vs $6000), it would take ten years of additional gains to offset paying an extra $24k for one property after a flipper made it lendable with some elbow grease.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy on August 13, 2014, 08:40:20 AM
It's easier to make money buying than selling, and needing to take out a loan can make you miss opportunities for great buys.

Can't I say the opposite, that needing to wait to save up to buy 100% cash (instead of 25% down payment, or whatever) can make you miss great buys?
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Mr Mark on August 13, 2014, 10:21:15 AM
You can buy with cash, then back out equity with a refi later. In fact, by leveraging your other properties, you're more likely to have the cash needed to move fast.

and leverage does not per se equal risk. Having all equity concentrated in a few assets vs being able to spread it around impacts risk as well. It's your ability to service the debt, on top of other liabilities; taxes, utilities,  maintenance,  hoa. So it's all about your core liquidity and debt/equity ratio across your stash.

And, not to flog a dead horse,  but being able to get a loan of 80% at a low fixed rate for 30 years that is non callable.  Wow. Non-callable. This is totally different to any other type of debt. There are no margin calls if the value of the property falls, or even if the equity becomes negative! If you can't beat 4% nominal returns on capital over the next 30 years your FIRE assumptions are shot anyhow, right?

If you have opportunities to invest at a cash on cash return of say 15%, and your debt ratio is low, or even zero, you'd be crazy to constrain your portfolio earnings by not getting that cheap money and investing it. YMMV

Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy on August 13, 2014, 10:40:02 AM
You can buy with cash, then back out equity with a refi later.

In my experience, it's much easier to get a loan for a purchase than a cash out refi.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Mr Mark on August 13, 2014, 10:53:38 AM
You can buy with cash, then back out equity with a refi later.

In my experience, it's much easier to get a loan for a purchase than a cash out refi.

and when you still have a job. That's why I'll pull the equity from our main house now, and invest that in cash RE to start with.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy on August 13, 2014, 11:38:12 AM
You can buy with cash, then back out equity with a refi later.

In my experience, it's much easier to get a loan for a purchase than a cash out refi.

and when you still have a job. That's why I'll pull the equity from our main house now, and invest that in cash RE to start with.

Definitely.

BTW - the clock is ticking on the tagline under your username/post count/location... :D
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Mr Mark on August 13, 2014, 02:18:48 PM
You can buy with cash, then back out equity with a refi later.

In my experience, it's much easier to get a loan for a purchase than a cash out refi.

and when you still have a job. That's why I'll pull the equity from our main house now, and invest that in cash RE to start with.

Definitely.

BTW - the clock is ticking on the tagline under your username/post count/location... :D

hah hah! Well spotted ARS. Actually hit that target ok. As defined by net worth. But, for various great reasons, am continuing to work and rack up some buffer stash, and deciding to have a bigger house than needed for pure hedonistic pleasure... so FI, but not yet RE. I estimate 3 more years.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Mr Mark on August 13, 2014, 06:02:28 PM
Update done.

There are many routes to mustashianism.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper on August 13, 2014, 06:59:15 PM
It's easier to make money buying than selling, and needing to take out a loan can make you miss opportunities for great buys.

Can't I say the opposite, that needing to wait to save up to buy 100% cash (instead of 25% down payment, or whatever) can make you miss great buys?

Yes and no.  I think using debt (such as an existing HELOC) to snag a great deal without financing contingencies is a good idea, but holding that debt long term may not be as profitable as selling some stocks to pay it off so you can repeat the process.

What doesn't make sense to me is paying 10-20% more to get a place that a bank will lend on.  That initial overpayment could take a decade to recoup from cash flow.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy on August 14, 2014, 07:38:38 AM
It's easier to make money buying than selling, and needing to take out a loan can make you miss opportunities for great buys.

Can't I say the opposite, that needing to wait to save up to buy 100% cash (instead of 25% down payment, or whatever) can make you miss great buys?

Yes and no.  I think using debt (such as an existing HELOC) to snag a great deal without financing contingencies is a good idea, but holding that debt long term may not be as profitable as selling some stocks to pay it off so you can repeat the process.

Why the heck would you sell the stocks to pay off a low interest loan, then retake out a loan to buy more real estate, paying the lending fees and transactions costs on that all over again?

Sell the stocks to buy in cash, if you want, but getting a mortgage, paying it off, then getting a mortgage to buy more, etc.. seems so circular.  Keep the low interest mortgage in the first place and use the cash to buy more, if that's your goal.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper on August 14, 2014, 09:45:22 AM
It's easier to make money buying than selling, and needing to take out a loan can make you miss opportunities for great buys.

Can't I say the opposite, that needing to wait to save up to buy 100% cash (instead of 25% down payment, or whatever) can make you miss great buys?

Yes and no.  I think using debt (such as an existing HELOC) to snag a great deal without financing contingencies is a good idea, but holding that debt long term may not be as profitable as selling some stocks to pay it off so you can repeat the process.

Why the heck would you sell the stocks to pay off a low interest loan, then retake out a loan to buy more real estate, paying the lending fees and transactions costs on that all over again?

Sell the stocks to buy in cash, if you want, but getting a mortgage, paying it off, then getting a mortgage to buy more, etc.. seems so circular.  Keep the low interest mortgage in the first place and use the cash to buy more, if that's your goal.

What lending fees and transactions costs are you thinking of?  My HELOC only charges interest, and the loan gets repaid quickly enough that the costs are minimal.

Keeping the loan to keep your stocks is the semantic equivalent of mortgaging your home to gamble in the bourse.  You may be comfortable with that risk, but I only give Wall Street money I can afford to lose.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy on August 14, 2014, 10:08:19 AM
Keeping the loan to keep your stocks is the semantic equivalent of mortgaging your home to gamble in the bourse.

Heck yes it is.  And I'll take a low interest rate, fixed, noncallable loan to invest every day.

You say gamble.  I say invest.  Clearly we have very different approaches to the stock market (or real estate).  :)
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper on August 14, 2014, 11:52:46 AM
Keeping the loan to keep your stocks is the semantic equivalent of mortgaging your home to gamble in the bourse.

Heck yes it is.  And I'll take a low interest rate, fixed, noncallable loan to invest every day.

You say gamble.  I say invest.  Clearly we have very different approaches to the stock market (or real estate).  :)

By the classic definition, you're speculating rather than investing.  It may work out fine for you, but pushing the use of margin as an "investment" strategy is less than honest.



Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy on August 14, 2014, 12:10:17 PM
Keeping the loan to keep your stocks is the semantic equivalent of mortgaging your home to gamble in the bourse.

Heck yes it is.  And I'll take a low interest rate, fixed, noncallable loan to invest every day.

You say gamble.  I say invest.  Clearly we have very different approaches to the stock market (or real estate).  :)

By the classic definition, you're speculating rather than investing.  It may work out fine for you, but pushing the use of margin as an "investment" strategy is less than honest.

What classic definition is this?

Under your definition, every investor who has a 401k while holding a mortgage is speculating?

/shrug

That's fine if that's the definition you want to use.  It's a pretty strict one, and it's not a definition I agree with.

To call someone "less than honest" because you have a different definition than them of something is rude*.

*Depending on your definition of rude.  It fits mine.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper on August 14, 2014, 01:11:02 PM
Keeping the loan to keep your stocks is the semantic equivalent of mortgaging your home to gamble in the bourse.

Heck yes it is.  And I'll take a low interest rate, fixed, noncallable loan to invest every day.

You say gamble.  I say invest.  Clearly we have very different approaches to the stock market (or real estate).  :)

By the classic definition, you're speculating rather than investing.  It may work out fine for you, but pushing the use of margin as an "investment" strategy is less than honest.

What classic definition is this?

Under your definition, every investor who has a 401k while holding a mortgage is speculating?

/shrug

That's fine if that's the definition you want to use.  It's a pretty strict one, and it's not a definition I agree with.

To call someone "less than honest" because you have a different definition than them of something is rude*.

*Depending on your definition of rude.  It fits mine.
Calling someone out on BS may be rude, but it's honest.  You've been rude to me in the past, so I'm not pulling my face punches when you say something stupid.  Fair enough?

Speculation requires markets to move in only one direction, while investments are able to withstand severe bouts of inflation or deflation.  You are speculating that inflation will continue indefinitely at above 4%, and could be wiped out by a large move in the other direction.  Conversely, you could also come out further ahead.

I'm investing without the use of leverage, and will be fine regardless of which way the economy moves. 
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: johnhenry on August 14, 2014, 02:59:47 PM
I'm investing without the use of leverage, and will be fine regardless of which way the economy moves.

Fair enough.  But according to your definition anyone who borrows money in any circumstance is speculating.  After all, job markets ebb and flow just like stock and real estate markets.  It's always possible that the student signing up for student debt and an advanced degree will graduate just in time for the next great depression and wind up in a bread line.  Is he speculating by borrowing to earn his degree?  Or is he leveraging his earning capacity in the future?

Is a business that borrows money to ramp up a new line of production speculating that it will pay off.  Or investing in a new line of business.  What's the difference?

With all reward there is risk.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Dicey on August 14, 2014, 03:05:58 PM
It's easier to make money buying than selling, and needing to take out a loan can make you miss opportunities for great buys.

Can't I say the opposite, that needing to wait to save up to buy 100% cash (instead of 25% down payment, or whatever) can make you miss great buys?

Hell, yes you can, ARS!

Edit: I posted this before I saw fixer-upper's remarks. I have never known ARS to be rude. In my experience he is remarkably fair and polite. And smart. He may also be wealthy and handsome, but I digress. To call his response "stupid" is very close to OOB and most certainly could be considered "rude". Please respect that there is relatively little of that on this forum and help to keep it that way. Everyone's comments are subject to interpretation and everyone deserves to be treated with respect. Based on the commitment that ARS has shown here, I'd say that any tie goes to him. Except that in this case, he's safe by a mile.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper on August 14, 2014, 03:20:03 PM
I'm investing without the use of leverage, and will be fine regardless of which way the economy moves.

Fair enough.  But according to your definition anyone who borrows money in any circumstance is speculating.  After all, job markets ebb and flow just like stock and real estate markets.  It's always possible that the student signing up for student debt and an advanced degree will graduate just in time for the next great depression and wind up in a bread line.  Is he speculating by borrowing to earn his degree?  Or is he leveraging his earning capacity in the future?

Is a business that borrows money to ramp up a new line of production speculating that it will pay off.  Or investing in a new line of business.  What's the difference?

With all reward there is risk.

Not all borrowing is speculative.  Using a HELOC or CC as a short term tool to move assets is an example of a non speculative loan. 

I'd class student loans as speculative, as well as your example of business expansion.  If that business used a LOC to purchase supplies to fill an order, I'd consider it non speculative.

Speculation isn't always bad, but it does differ from investing.

Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper on August 14, 2014, 03:26:17 PM
It's easier to make money buying than selling, and needing to take out a loan can make you miss opportunities for great buys.

Can't I say the opposite, that needing to wait to save up to buy 100% cash (instead of 25% down payment, or whatever) can make you miss great buys?

Hell, yes you can, ARS!

Edit: I posted this before I saw fixer-upper's remarks. I have never known ARS to be rude. In my experience he is remarkably fair and polite. And smart. He may also be wealthy and handsome, but I digress. To call his response "stupid" is very close to OOB and most certainly could be considered "rude". Please respect that there is relatively little of that on this forum and help to keep it that way. Everyone's comments are subject to interpretation and everyone deserves to be treated with respect. Based on the commitment that ARS has shown here, I'd say that any tie goes to him. Except that in this case, he's safe by a mile.

Feel free to search his posts for the word "stupidest", and decide for yourself if my response was justified. 
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Dicey on August 14, 2014, 07:14:04 PM
[quote author=fixer-upper link=topic=20564.msg371489#msg371489 date=1408051577
Feel free to search his posts for the word "stupidest", and decide for yourself if my response was justified. [/quote]

Um, I think I was crystal clear.

My purpose in commenting was to point out out how nice it is when people refrain from calling each other names or trivializing their opinions. This is a remarkably hostility-free forum, for which I give ARS a huge share of the credit. Judging by his stupendous number of posts, he's earned it, IMHO.

P.S. IF you think ARS has treated you unfairly in the past, feel free to PM him, but don't call his comments stupid publicly.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy on August 14, 2014, 07:17:43 PM
Feel free to search his posts for the word "stupidest", and decide for yourself if my response was justified.

I had literally no idea what you're talking about, so I ran that search myself.

Found the thread: http://forum.mrmoneymustache.com/off-topic/ot-judging-others/msg267054/#msg267054

With multiple people calling you out for racist comments, I don't know why you use that as your "go-to," but okay.  Looking at my message in it (the "stupidest" comment you're referring to), let's look at my actual wording:
I still consider your comment* one of the stupidest things I've ever read, and you'd done literally nothing so far to defend it or make me reconsider, as you haven't adequately addressed any of the comments about it.

*Note that your comment is different from you as a person.

If you get so offended by a comment like that (saying you made a dumb comment, and even purposefully distinguishing it from you, yourself) that four months later you still remember, and even lash out about it, well, that's a bigger issue than we can fix here.

Regardless, I'm sorry that you took such offense to my comment.  I didn't intend it to upset you so much, thus why I put the footnote disclaimer.  I apologize and do genuinely feel bad that a comment I made was upsetting enough to you stick with you and remember.

Anyways, let's table that, and stick with the on topic debate.

Speculation requires markets to move in only one direction, while investments are able to withstand severe bouts of inflation or deflation.  You are speculating that inflation will continue indefinitely at above 4%, and could be wiped out by a large move in the other direction.  Conversely, you could also come out further ahead.

I'm investing without the use of leverage, and will be fine regardless of which way the economy moves. 

Okay, if you want to use that definition, we can.  I don't see why investing rather than paying off a mortgage is always speculating.

Let's say I invest in a cash flowing property and buy below market.  Even if the market is flat or slightly negative, I can still come out ahead having used the leverage.  Your definition of "speculating requiring the market to move in a certain direction" doesn't fit many correct uses of leverage.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper on August 14, 2014, 08:47:55 PM
I still consider your comment* one of the stupidest things I've ever read, and you'd done literally nothing so far to defend it or make me reconsider, as you haven't adequately addressed any of the comments about it.

*Note that your comment is different from you as a person.

If you re-read what I posted above, I did not call you dishonest or stupid.  Some of your posts may be less than honest or stupid because of ignorance, which I was trying to correct.

Quote
If you get so offended by a comment like that (saying you made a dumb comment, and even purposefully distinguishing it from you, yourself) that four months later you still remember, and even lash out about it, well, that's a bigger issue than we can fix here
.

I have a remarkable memory, and remember the good along with the bad.  One of your first posts to me was quite blunt, so I figured you wouldn't be a pansy if I was just as blunt.  Apparently I was wrong. 

Quote
Let's say I invest in a cash flowing property and buy below market.  Even if the market is flat or slightly negative, I can still come out ahead having used the leverage.  Your definition of "speculating requiring the market to move in a certain direction" doesn't fit many correct uses of leverage.

You can come out ahead flat "or slightly negative", but can your FIRE plan handle a 10-20% correction in both stocks and rents?  Would you be bankrupt at 50%?

That's a rhetorical question with no answer needed, other than to ask yourself whether you can really consider yourself an investor if a 20% nosedive in rents would leave you bankrupt.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: waltworks on August 14, 2014, 09:32:43 PM
A giant meteor could hit the earth tomorrow, so am I speculating when I save money instead of spending it tonight on hookers, blow, and all the pints of moosetracks at the market?

All investments are calculated risks. There is not a distinct line between "speculation" and "investment" - there is risk in everything, so what is an investment to one person can be irresponsible speculation to another and they can both be right. Investments can fail and leave you bankrupt. Speculation can make you rich.

Using leverage to purchase anything has risks and benefits but in many situations (great deal on a cash flow rental, new oven to triple the capacity of your bakery, etc) it's arguably a worthwhile risk to take.

-W
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper on August 14, 2014, 10:25:45 PM
All investments are calculated risks. There is not a distinct line between "speculation" and "investment"

Merriamwebster Webster defines the difference as "the assumption of unusual risk".  I maintain that mortgaging your home in order to bet in the stock market is more than a usual risk.

Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: waltworks on August 14, 2014, 10:57:23 PM
Ok, define "unusual" for us, then.

Oh, hey, it's a subjective term too?

Mortgaging your house to invest in stocks *could* be a reasonable move in the right circumstances - you won't find a 30 year period in the history of the market where overall returns are less than the ~4% you'd pay right now, certainly, so if your time horizon is long enough and you can swing the mortgage payments...

-W

All investments are calculated risks. There is not a distinct line between "speculation" and "investment"

Merriamwebster Webster defines the difference as "the assumption of unusual risk".  I maintain that mortgaging your home in order to bet in the stock market is more than a usual risk.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper on August 15, 2014, 12:20:31 AM
Mortgaging your house to invest in stocks *could* be a reasonable move in the right circumstances - you won't find a 30 year period in the history of the market where overall returns are less than the ~4% you'd pay right now, certainly, so if your time horizon is long enough and you can swing the mortgage payments...

...you'll be upside down when interest rates rise, and hurt again when people flee stocks for decent yields on bonds.

I'm not debating that it *could* be a reasonable move in the right circumstances* or that it's even the wrong move now.  All I'm saying is that the added risk of margin and reliance on just the right amount of inflation makes it speculation rather than investment. 

* A similar argument could be made for pulling out a variable rate mortgage during Volker-type inflation where you could lock in some great bond yields with the hope that interest rates would drop before the bonds matured.


Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: waltworks on August 15, 2014, 08:34:10 AM
Ok, fair enough. I remember now - you're one of the folks super concerned about the national debt/hyperinflation and such, right? From that perspective a lot of investments will look like irresponsible speculation. Some of us just aren't as concerned/more optimistic.

-W
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy on August 15, 2014, 09:54:29 AM
All investments are calculated risks. There is not a distinct line between "speculation" and "investment"

Merriamwebster Webster defines the difference as "the assumption of unusual risk".  I maintain that mortgaging your home in order to bet in the stock market is more than a usual risk.

Really?  Because the majority of people who invest in their 401k have a mortgage.  Doesn't that, by definition, make it a "usual" risk?

From that perspective a lot of investments will look like irresponsible speculation. Some of us just aren't as concerned/more optimistic.

Right.  And it's hard to argue against a moving target, especially a hostile one, makes reasonable debate much harder.

If his definition is "need the market to move a certain way" and you use leverage for high cash flow properties and don't care about the value, then it's not necessarily speculating.  If it's "unusual risk" then it's not necessarily speculating.

Can you speculate while having a mortgage? Certainly.  But can you "invest" while holding a mortgage?  Absolutely.  They're not necessarily related, and having a mortgage while investing doesn't necessarily mean you're speculating under any reasonable use of the word.

In any case, I'm mildly interested to hear the next definition of speculating he thinks will make all investing while holding a mortgage "speculation."
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper on August 15, 2014, 10:19:38 AM
Ok, fair enough. I remember now - you're one of the folks super concerned about the national debt/hyperinflation and such, right? From that perspective a lot of investments will look like irresponsible speculation. Some of us just aren't as concerned/more optimistic.

-W

You've gotta love the subtle character attacks on this site.  You folks attack the messenger almost as often as a sleazy politician.

For what it's worth, I'm neither paranoid (ala zerohedge) nor delusional (zerohedge haters).  Im cautiously optimistic and tend to keep debt levels somewhat below Berkshire Hathaways levels.  If you think triple that is a great idea, I wish you luck, but suspect it could bite you if held for thirty years.



Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: waltworks on August 15, 2014, 10:29:46 AM
I don't see how that's an attack on your character. Does it accurately describe your current thinking, or not? In the context of our discussion, your judgement/tolerance of risk regarding "investment" vs "speculation" is going to be heavily influenced by your outlook on the future of the US/world. Mine is very, very positive so I'm happy to take on debt when there is an opportunity that makes sense.

-W

Ok, fair enough. I remember now - you're one of the folks super concerned about the national debt/hyperinflation and such, right? From that perspective a lot of investments will look like irresponsible speculation. Some of us just aren't as concerned/more optimistic.

-W

You've gotta love the subtle character attacks on this site.  You folks attack the messenger almost as often as a sleazy politician.

For what it's worth, I'm neither paranoid (ala zerohedge) nor delusional (zerohedge haters).  Im cautiously optimistic and tend to keep debt levels somewhat below Berkshire Hathaways levels.  If you think triple that is a great idea, I wish you luck, but suspect it could bite you if held for thirty years.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy on August 15, 2014, 11:41:51 AM
I don't see how that's an attack on your character.

Agreed.

This:
you're one of the folks super concerned about the national debt/hyperinflation and such, right?

Seems about as neutrally worded as possible.  If you wanted to attack someone's character, there's many ways to word that to make him sound much more nutty.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper on August 15, 2014, 01:51:58 PM
I don't see how that's an attack on your character.

Agreed.

This:
you're one of the folks super concerned about the national debt/hyperinflation and such, right?

Seems about as neutrally worded as possible.  If you wanted to attack someone's character, there's many ways to word that to make him sound much more nutty.

I'm sure he could have been more direct, such as the way you referred to me as hostile,, but it was still meant to undermine my words through inferring that I was radical in my viewpoints.  Its standard political maneuvering when one is losing an argument based on facts.

Perhaps we could get back to the subject of debt as leverage.  You seem to favor something like 75%, while your idol Buffet goes for about 1/3 that much. 

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.  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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Mr Mark on August 15, 2014, 03:58:10 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Another Reader 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper 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. 
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: waltworks 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: Another Reader 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper 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?
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: fixer-upper 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: TomTX 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.
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: waltworks 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
Title: Re: Real Estate's solution to FIRE is Debt. How is this feasible long-term?
Post by: arebelspy 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.