The fundamental cause of debt

[Nutria]

https://youtu.be/zvBsHWNn8W8?t=4m15s It runs until 6:48.

[TexasHusker]

Debt is either "good" or "bad." Good debt is called leverage. Wealth is made not by successful saving, but by successful leveraging.

Example

John Doe buys a rental house for $150,000, putting $30,000 of his own money into the home. He then rents it out for $1400 per month. Of course, it's not rented year-round, and he taxes, insurance, and upkeep. So his "real" monthly income is about $1000.00, likely enough to float the mortgage and maybe just a little more.

But in 10 years, that $150,000 home has increased by 2% each year - it is now worth $187,000. Also, the renters have paid off about $100K of the debt on the home.

So you sell the home for $176K after realtor fees, and pay off the remaining $50K of the note.

You've walked away with $126,000, having invested only $30,000. You've pulled a three-bagger in 10 years. That is a staggering return on investment, for very little effort or expertise.

You then take your $126K, invest in 4 houses this time, and you walk away in 10 more years with $500,000 in your pocket.

You then take your $500K, invest in 16 houses, and you walk away in 10 more years with...$2 million.

You figure out a way to accelerate this a little bit by starting with 2 or 3 houses, you could end up at $6-7 million in 30 years, from a $100K total investment today.

You can see how people get very rich, fairly quickly, by investing in real estate of various kinds. This is with VERY low price appreciation.

You can only build wealth through the wise use of LEVERAGE.

[corn18]

Debt is either "good" or "bad." Good debt is called leverage. Wealth is made not by successful saving, but by successful leveraging.

Example

John Doe buys a rental house for $150,000, putting $30,000 of his own money into the home. He then rents it out for $1400 per month. Of course, it's not rented year-round, and he taxes, insurance, and upkeep. So his "real" monthly income is about $1000.00, likely enough to float the mortgage and maybe just a little more.

But in 10 years, that $150,000 home has increased by 2% each year - it is now worth $187,000. Also, the renters have paid off about $100K of the debt on the home.

So you sell the home for $176K after realtor fees, and pay off the remaining $50K of the note.

You've walked away with $126,000, having invested only $30,000. You've pulled a three-bagger in 10 years. That is a staggering return on investment, for very little effort or expertise.

You then take your $126K, invest in 4 houses this time, and you walk away in 10 more years with $500,000 in your pocket.

You then take your $500K, invest in 16 houses, and you walk away in 10 more years with...$2 million.

You can see how people get very rich, fairly quickly, by investing in real estate of various kinds. This is with VERY low price appreciation.

You can only build wealth through the wise use of LEVERAGE.

You are wrong. That is NOT the only way to build wealth. And talk to all the non millionaires that tried your method in 2006. You make it sound like housing prices will always go up.

[TexasHusker]

You are wrong. That is NOT the only way to build wealth. And talk to all the non millionaires that tried your method in 2006. You make it sound like housing prices will always go up.

Real estate isn't a one year deal. Out of the 200+ MSAs in the US, there are some where houses are CHEAPER in 2016 than in 2006. If you were dumb enough to buy while things were going parabolic (like I did on a couple of houses), it set you back. Yet my renters still paid for the darn things all the while.

I am interested to hear your understanding of my "method".

[tripods68]

Real estate isn't a one year deal. Out of the 200+ MSAs in the US, there are some where houses are CHEAPER in 2016 than in 2006. If you were dumb enough to buy while things were going parabolic (like I did on a couple of houses), it set you back. Yet my renters still paid for the darn things all the while.

I am interested to hear your understanding of my "method".

While concentrating your eggs into one basket (like real estate market) can be lucrative its also high risk 'game of thrones' leverage scheme. You need to understand the game/how its played, know the market/town, know the people/players mentors, contractors, realtors, etc. I just don't have enough time of the day to really learn this industry. For that i'm out.

[TexasHusker]

While concentrating your eggs into one basket (like real estate market) can be lucrative its also high risk 'game of thrones' leverage scheme. You need to understand the game/how its played, know the market/town, know the people/players mentors, contractors, realtors, etc. I just don't have enough time of the day to really learn this industry. For that i'm out.

Meh. You can do a half day's worth of research and figure out what a decent deal on a rent house is.

[Joan.of.the.Arch]

Nutria, have you ever had debt? If so, was your fundamental reason the same as highlighted in the film you link?

[Nutria]

Nutria, have you ever had debt?

Much. But not anymore.

If so, was your fundamental reason the same as highlighted in the film you link?

Yup...

[LivingAlmostLarge]

texas how do you pay off $100k in 10 years on a home? Based on how mortgages are calculated, usually you don't pay off that much. According to a normal amortization table on 30 year you only pay off $30k. On a 15 year payment you might pay off $100k but only if everything is perfect and you pay no maintenance or property taxes and are able to rent out a property that is $150k for $1400/month.

So I'm not sure how the numbers all work out. I don't disagree about appreciation, but in a low cost of living area that $150k is a house, are you sure appreciation really is 2%? And not less?

[siggy_freud]

So I'm not sure how the numbers all work out. I don't disagree about appreciation, but in a low cost of living area that $150k is a house, are you sure appreciation really is 2%? And not less?

Not infathomable, and entirely depends on the market and area. I bought a home about 40 mins from the Portland, OR area in 2011 for 100k. I put about 10k of materials and personal labor into it. 6 years later comps are selling for 70-100k more. I've also had a renter in it for the last 6 years. About two years in though I did refinance as rates were 1% lower, and I thought my work on it would bump the LTV enough to get out of PMI, which it did. Lowered the payment from $735 to $600 a month, which in a rental was big.

If you're going for long-term investments then you're a bit insulated from the housing market ups and downs. The rental market really didn't budge a whole lot in the last housing bubble-burst.

Texas' strategy has to be timed with the market right, in terms of selling at the right time to leverage yourself into more houses, but traditionally I think the rental market has been pretty strong. When the last bubble burst home prices went down, but so did the availability of financing, which meant more people couldn't get loans and had to rent. With restrictions opening up a bit more, people are buying again, but that also takes inventory which makes renting more competitive, which raises prices. My .02 anyways (and that's about all it's worth).

[tripods68]

Meh. You can do a half day's worth of research and figure out what a decent deal on a rent house is.

I can figure it out those easily in our are to find the 'best' deals, except we're not in the position to buy a rental property now until both of us are retired.

FWIW

I have a several friends did those "home flipping" you did, failed BIG...i mean BIG TIME!

Unfortunately housing market aren't always growing linear. If everybody can do it successfully everybody will do it (I don't the know statistic, but out of 10 people, maybe 1 can be lucky) Consider yourself lucky for sticking to it, but most aren't "rugged' risk taker.

[LivingAlmostLarge]

But siggy, your $150k home rented out for $1400? And in 10 years it was paid off $100k in 10 years?

[siggy_freud]

But siggy, your $150k home rented out for $1400? And in 10 years it was paid off $100k in 10 years?

I wasn't really commenting on the math. I was confining my comment to the bit about using the appreciation to leverage yourself into a bigger portfolio. But a lot depends on the financing. If the home was financed over 10-15 years then you'd likely have nearly that paid off, as the amount going to interest, even initially, would be drastically less.

On our 30 year our mortgage payment was about 1300-something a month, with 800 of that going to interest, and the rest principle.

Same house on a 15 year and over 1000 of it is going to principle per month.

So if the 150k home was financed over 15 years, 10 years in you'd have a balance $50,746 remaining based on the amortization table, so it's feasible to see you'd have paid off 100k of it over that time. Payment would be $1,072 before taxes/insurance. So if rent was $1,400 then I think yes, his numbers could work out.

[JoeP]

John Doe buys a rental house for $150,000, putting $30,000 of his own money into the home.

Your post makes no sense.

The topic is "the fundamental cause of debt" and you start off with a hypothetical person going into debt? You could have stopped right there and won the argument: that person went into debt by borrowing money to buy something that he or she could not afford.

[LivingAlmostLarge]

but with taxes and insurance and maintenance and vacancy would $1400 be enough? And do most $150k homes rent for $1400 minimally or more? Or do they rent closer to $1000?