Leveraging Credit

**corn18** · 03-03-2017, 01:05 PM

Originally posted by amarowsky View Post

It seems to me the reason real-estate is such an interesting investment, is because of the ability to leverage a high value purchase with little to any collateral.

Ex. a person making $60K with little to no debt can usually leverage their credit to purchase a home up to $225k ish.

I was trying to think of other ways to leverage credit to invest, and I didn't have a whole lot of answers that were nearly as close to this amount that don't involve real estate or high assets as collateral:
1) Line of credit (cards, smaller loans)
2) Margin purchase of stock
3) ?

This seems to be almost unique way to get funding for a purchase of a home (or investment). Is this the strongest reason that supports the theory that most man made millionaires do it through real estate?

The idea that someone could buy a house at a good time and sell for so much more seems to be kind of unique. I want to know if anyone else has examples of similar scale that are as easily accessible as a mortgage.

I can't find any data that support your assertion that most man made millionaires do it through real estate. My quick Google search indicated they did it by saving money. Please clarify and support your finding.

**97guns** · 03-04-2017, 08:43 AM

Originally posted by corn18 View Post

I can't find any data that support your assertion that most man made millionaires do it through real estate. My quick Google search indicated they did it by saving money. Please clarify and support your finding.

His assertions are based on theory, not findings

**AJ444** · 03-04-2017, 05:53 PM

I just hit a million and none of it was from real estate, in fact prior real estate transactions were a drag on getting there.

**97guns** · 03-05-2017, 09:15 AM

Originally posted by AJ444 View Post

I just hit a million and none of it was from real estate, in fact prior real estate transactions were a drag on getting there.

Just like driving in the city, there are many ways to get to the destination, take 1 street and you might hit traffic, take another and get there 10 minutes early. RE worked for me, got me there before all my friends arrived

**amarowsky** · 03-06-2017, 05:51 AM

I thought I remembered reading it in "the millionaire next door", but it has probably been a decade since I read that book. I don't recall exactly where I heard it, but it did not seem very difficult to believe.

I think around that time I also read "rich dad, poor dad". It possibly could have been in that book?

Or maybe I just heard that as a statistic provided online sometime in the past.

**scfr** · 03-06-2017, 06:42 AM

You didn't read that in "Millionaire Next Door."

**james.hendrickson** · 03-06-2017, 07:23 AM

This is one of my favorite topics.

The Millionaire Next Door is based on marketing data gathered by Thomas Stanley.

What Stanley says is that millionaires own their own homes, but that they are extremely sensitive to the lifecycle costs of the homes. So, not only do they factor in the cost of the mortgage, property taxes and PMI, they also factor in the costs of heating, repairs, parts, etc. over the entire lifecycle of the property. This is because maintenance costs are real and inevitably occur.

As a result, balance sheet affluent millionaires (e.g. those with lots of money, not lots of flashy stuff), tend to have modest homes or homes that are valued at just 1.5 times the millionaire's median income. So, if the millionaire has income of $100,000, the value of their house would be $150,000.

So, yes, according to the Millionaire Next Door author, Millionaires do own real estate, but the real estate they own tends to be modest to control costs.

Linky: http://www.thomasjstanley.com/2011/1...ire-rule-1-49/

**GoodSteward** · 03-06-2017, 07:24 AM

At that salary level, you need to stay away from leveraging large amounts of debt as much as possible. Debt means payments(loss of income). On real estate, you'll have the payment, interest, and all upkeep such as insurance, etc. For a long time, you'll have very little, if any, profit unless you do it just right(get lucky) and avoid issues such as nobody renting for periods of time, or major damage from renters. You might be able to break even, but that is a terrible investment IMO(again, at that salary level). Rental properties are better for long term goals(move and rent the previous house for instance), you buy cheaper properties knowing you will have no return for a while, OR you have enough cash to buy into it such as Texas did.

I personally don't know of anybody that actually did well buying real estate as an investment with a loan and a salary you are talking about and it be a good move. Usually, you hear of those people having horror stories.

Once you hit a certain level of income, and learn what you are doing, you can leverage larger debt to your advantage, but it is always a major risk. IMO the risk is too high for low earners to be bothering with this. If it goes south, it could be devastating long term. IMO, leveraging debt needs to match the income you have. You have to figure if this falls apart, can I sustain all the payments with my current income? How fast can I recover? At 60k/yr if you have to eat all the payment and expenses you'll have no money left to put into retirement, or very little.

In that income you mentioned, the only debt leveraging I would see is maybe buying a car very low interest/no interest and deciding to put that money somewhere to earn more interest, or investing vs paying down a home sooner. That's the only kind of leveraging I think a 60k/yr person should be bothering with. Not do I want to borrow to buy a quarter million dollar home to rent.

**~bs** · 03-06-2017, 01:20 PM

you can do it if you own a business as well.

Say you have a business credit card, and spend $10k a month, which is offset against revenue of $12k a month. As long as you pay off the card monthly, you incur no interest charges, and can operate with no cash out of pocket. Of course, you will need to have a cash reserve in the event of unforeseen difficulties.

The figures I'm using are small, and just for example. Once the amount grows, you can see why not tying up your own cash is advantageous. What if you're looking at 100k in costs and $120k in revenue a month. Using the card helps you manage the cash flow better. I guess you can view it as not a true leverage in that you're only carrying 1-2 months worth of expenditures at the most. BUT you can increase your purchasing to the limit of your credit instead of solely relying on cash in your bank account. A business line of credit could save the same purpose (with lower interest rate), but the bank would probably want to collateralize the line against real property.

**GoodSteward** · 03-06-2017, 01:50 PM

Originally posted by ~bs View Post

BUT you can increase your purchasing to the limit of your credit instead of solely relying on cash in your bank account.

This is a very common practice among larger companies especially. We just had a meeting where they stated they got their repayment time extended from a 60 day window to either 90 or 120 days. Something like that (I'm in IT not finance). They stated it allows them to leverage their buying power and gives more time to sell the product instead of being hurt if it is still in the warehouse.

**amarowsky** · 03-09-2017, 08:37 AM

I must have just been under the influence that this was a more globally held idea. Perhaps this was one of those things I read a long time ago that just stuck with me because I never heard anything specifically to disprove it.

I'm looking it up online now and not really finding anything specific to support it (real estate being most common way individuals become millionaires). I'm pretty sure I did hear it from some book, blog, or documentary.

I remember hearing it and thought to myself that it made some sense... I always just thought it was because there is no other way to leverage a high value asset with a long term loan that has tax benefits, that seemed like reason enough that I could understand people becoming so wealthy from it.

Upon more digging and real estate is only the 3rd highest industry that the "ultra rich" make their wealth from. This is from a Forbes list I was reading. I also found some other article somewhat supporting the strong points. But I no longer believe my original post after more research. (here's a link to another site that I saw)

How Do Most Millionaires Make Their Money?

https://investfourmore.com/2015/09/14/how-do-most-millionaires-make-their-money/

Making one million dollars is not as impressive as it used to be thanks to inflation. It is still the goal for many however, so how to most millionaires make their money?

Leveraging Credit