[Benny Hicks]

Just this page out, here's an excerpt:
"I have found that if you look into the lives of the kind of people you want to be like, you will find common themes. If you want to be skinny, study skinny people, and if you want to be rich, do what lots of rich people do, not what some mythsayer says to do. The Forbes 400 is a list of the richest 400 people in Ameria as rated by Forbes magazine. When surveyed, 75 percent of the Forbes 400 (rich people, not your broke brother-in-law with an opinion) said the best way to build wealth is to become and stay debt free. Walgreen's, Cisco, Microsoft, and Harley-Davidson are run debt free. I have met with thousands of millionaires in my years as a financial counselor, and I have never met one who said he make it all with Discover Card bonus points. They all lived on less than they made and spent only when they had cash. No payments."

[+Donny]

you can, but not in my business... leverage is the name of the game, and despite what that guy says, its working for me!

How does having debt create leverage?

[anathema]

Donny,
Using other peoples money to get you income producing assets. I have 3 friends with around 3 million in debts each. They leveraged other peoples money (banks) to buy real estate that feeds them passively. So, while they have 3 million each in mortgage debt, its bringing in around $10,000-12,000 or more a month. How, when you have $12,000 a month coming in as INCOME, is that a bad thing at all? I just dont see it. Add that money to the hundreds of thousands in equity that they can either pull out to buy more properties (down payments, advertising, fix up etc..), or sit on as a nice nest egg (but these guys are pros, so they reinvest). If they wanted to sell every property and roll that money into a huge $10 million dollar 400 unit apartment complex or retail space, they can do it tax free even (and be 10 million in debt).

Sooo, to recap... $12,000/mo of PASSIVE (not working for it) income PLUS hundreds of thousands in equity, PLUS the ability to buy bigger property (getting into more debt) with no taxes on capital gains..... this is bad how?

In real estate, tell me how you get started with no debt? Ya, my bartending/waiting tables is going to let me save $150,000 for a house to buy outright? In right around 45 years..
I started a business 3 months ago, and already have my first investment property. I could leverage the equity towards 2 more properties (down payment), but my great credit score and the 'evil credit system' will allow me a 100% loan on investment property. I really cant hate credit now, can I?

And since I personally KNOW and call friends about 13 millionaires who started just like me, using debt to their advantage, I really can refute everything Dave Ramsey has to say. Now, he has good advice, but not nurturing your credit in the process is rediculous.

let the 'what ifs?' Begin!

*anathema*

[+Donny]

I don't know about others, but I'm not saying that debt is necessarily stupid or bad. It's like fire; if you use it properly and carefully, it is a great tool.

Now, as far as additional considerations into your post, I think you made it sound a lot simpler than it really is. For example, mortgage payments are definition; the bill is coming every month. Income is not necessarily gauranteed, and therefore there is an element of risk in that.
Furthermore, you have to measure the gain vs. the loss. If you had $100,000, would it be better to take out loans on ten houses, making a $10,000 down payment on each, or would it be better to buy only one house, with no mortgage? Or perhaps keep the $100,000 as a sort of insurance, and just take out loans on houses with no down payment? It just depends.
As far as your comments on hundreds of thousands in equity and $12,000/mo passive income, you seemed to make it sound a lot better than it is. Is that gross, or net equity and income? If you have a $100,000 house with a $95,000 mortgage on it, that's not much equity. And I'm no real estate expert, but I know that renting houses is not passive. There is work you have to do, in terms of upkeep and management. Furthermore, there is time invested in initially finding the property and knowing when to sell, or who to allow to rent it out.

Finally, I want to repeat that I don't find debt or credit evil or stupid necessarily. I plan on getting a credit card and paying it off every month for the sake of building up credit, as I'm sure I will eventually have a mortgage. However, the point is that debt is also dangerous when misused. If you max out all your credit cards on a frivolous lifestyle, then you are sticking a torch in your face, and that's a lot different than your example of investment.

Oh, and your example does not apply to all businesses. Many businesses only have a small portion of their costs as fixed, so getting their buildings, vehicles, and other fixed costs out of the way without debt would be a much better benefit to them than it would be to you. To the real estate investor, more capital pretty much means more investment and more income. To the local grocer, electrician, computer salesman, or many others, more buildings and more stock does not necessarily mean more income.

[Benny Hicks]

Originally Posted by +Donny

Income is not necessarily gauranteed, and therefore there is an element of risk in that.

And this is exactly the reason that Dave opposes the use of debt as a tool. Here is an explanation from the page I listed above:
"My contention is that debt brings on enough risk to offset any advantage that could be gained through leverage of debt. Given time, a lifetime, risk will destroy the percieved returns purported by the mythsayers. I once was a mythsayer myself and could repeat the myths very convincingly. I was especially good with the 'debt is a tool' myth. I have even sold rental property that was losing money to investors by showing them, with very sophisticated internal rates of return, how they would actually make money. Boy, what a reach. I could spout the myth with enthusiasm, but life and God had some lessons to teach me. Only after losing everything I owned and finding myself bankrupt did I think that risk should be factored in, even mathematically. It took my waking up in 'intensive care' to realize how dumb and dangerous this myth is. Life hit me hard enough to get my attention and teach me. According to Proverbs 22:7: 'The rich rule over the poor and the borrower is slave to the lender' (NKJV). I was confronted with this scripture and had to make a conscious decision of who was right - my broke finance professor, who taught that debt is a tool, or God, who showed the obvious disdain for debt. Beverly Sills had it right when she said, 'There is no shortcut to anyplace worth going.'"

Just as some background information, by the time he was 26, Dave had accumulated over $4 million in real estate, but not too long after he lost his entire portfolio. He then dug his way out of bankruptcy and started a ministry dedicated to providing sound financial advice to Christians who are in bankruptcy or who rely on debt to stay "afloat."

Ben

[Bryan]

Originally Posted by H.M. Murdock

The problem you're seeing is inefficiency at its peak. Beaurocracy takes too much money, has too many limits on nothing and doesn't get anything accomplished. If the government were to get serious about saving money and reduce federal spending to the bare bones, the main brunt would be placed on state government, but it would still be handled more efficiently. If money were more efficient in and of itself¹, then spending would be made even more efficient.

1) bureaucracy is the most efficient form of government regulation, an act of congress is much more difficult and time consuming than a bureaucracy.
2) placeing the responsibility on the state would in no way limit bureaucracy, it would only divide the massive federal bureaucracy in to smaller and more numerous bureacracies.

[anathema]

Originally Posted by +Donny

Now, as far as additional considerations into your post, I think you made it sound a lot simpler than it really is.

I believe it is that simple, after you have asked the standard questions and embrace something everyone is 'afraid of' (becoming more indebted) for your profitable gain.

For example, mortgage payments are definition; the bill is coming every month. Income is not necessarily gauranteed, and therefore there is an element of risk in that.

Ah yes, 'what if the mortgage isnt paid this month by my tenant?'. You could evict, or you could set up a program where they know you mean business. You could say, 'rent is $1150, but I will knock $150 off if its paid on time'. Simple really. People will pay on time more often, they dont want to loose out on this 'deal'. You cant stop people from not paying sometimes, you just make sure to have a 'reserve fund' set up that will carry you and your properties for 3-5 months if needed.

Furthermore, you have to measure the gain vs. the loss. If you had $100,000, would it be better to take out loans on ten houses, making a $10,000 down payment on each, or would it be better to buy only one house, with no mortgage? Or perhaps keep the $100,000 as a sort of insurance, and just take out loans on houses with no down payment? It just depends.

Very good scenerio, I have seen it many times before. From a pure 'investment' standpoint, you can only buy $100,000 of stocks or CDs or bonds or money market funds with $100,000, right? Investing that same amount into real estate could get you $1,000,000 worth of property, just like you said. From a financial standpoint, your one house you bought outright for $100,000 could be making around $800-1200/month, depending on rents in the area. lets just say its $1000 for this arguement and you are making 12% return on your investment before expenses!! Still better than the bank/CDs and the stock market (which is much, much riskier). Now take your 10 houses that cost you $10,000 each to get into, and are making $1000/month each like the above single house example. Well, your $100,000 investment is now making $120,000/year, or 120% before expenses.
Which is better? With controlled risk, it is possible.

As far as your comments on hundreds of thousands in equity and $12,000/mo passive income, you seemed to make it sound a lot better than it is. Is that gross, or net equity and income?

Nope, thats after expenses, not counting equity. Thats pure income, cash in the pocket...

If you have a $100,000 house with a $95,000 mortgage on it, that's not much equity.

As an investor, I aim to get $20,000 equity when I buy. I would not buy a house for $95,000 that could be sold for $100,000 as a rule. Unless the rents in the area were $1500/mo or the area was appreciating over 15% or some other creative investment reason, I wouldnt touch it. I am looking for discounts.
My first property has $35,000 in equity when I bought, only took $300 out of my pocket to get into (for an appraisal), and the area is appreciating 22%.

And I'm no real estate expert, but I know that renting houses is not passive. There is work you have to do, in terms of upkeep and management.

Very good point. For a mere 6% of the income from the property, I could have a management company do all the 'toilet fixing' and renting etc. for me. My goal isnt to be a landlord, but an investor, only worrying about the next deal.

Furthermore, there is time invested in initially finding the property and knowing when to sell, or who to allow to rent it out.

Another great observation, and yes there is this factor. While there are very powerful ways for deals to find you (my friends phone barely stops ringing with deals), finding the deal is actually very fun for most of us. It beats a 9-5 office job for sure! Just keep on top of your local market, get to know some like minded people, and you will take care of knowing when to sell/buy/rent/lease-option/etc.

Finally, I want to repeat that I don't find debt or credit evil or stupid necessarily. I plan on getting a credit card and paying it off every month for the sake of building up credit, as I'm sure I will eventually have a mortgage. However, the point is that debt is also dangerous when misused. If you max out all your credit cards on a frivolous lifestyle, then you are sticking a torch in your face, and that's a lot different than your example of investment.

The best observation yet, saying 'i will never get a credit card' is dumb in this day and age. There is lack of financial education in this country, my parents never taught me about credit or investing. Let along budgeting/saving. I feel cheated, and will absolutely assure that my kids will be experts on the subject. I plan to have my kid buy a house when he goes to college, rent out the other rooms and live free in his house while going to school and building his credit along the way.

Oh, and your example does not apply to all businesses. Many businesses only have a small portion of their costs as fixed, so getting their buildings, vehicles, and other fixed costs out of the way without debt would be a much better benefit to them than it would be to you. To the real estate investor, more capital pretty much means more investment and more income. To the local grocer, electrician, computer salesman, or many others, more buildings and more stock does not necessarily mean more income.

So true. But many many businesses start with a business loan or some sort of capital to fund it. I just got through reading a great book about starting/owning a business. Loved it.

Moving on....
Sounds like he is recoiling from bieng hurt and loosing money. Others in his situation would have learned and tweaked and pressed on, he decided to preach against it. Whatever justifies it for him I guess..

Only after losing everything I owned and finding myself bankrupt did I think that risk should be factored in, even mathematically.

Mathematically? I dont understand at all. Look at my above example of my first property. My $300 investment returns $35,000 in equity and is appreciating 22%. While I decided to live in it (we have never owned our own house...), It would be making me a modest $200-300/month. There is my car payment covered, or whatever. I have enough cash reserves to hold the property for 6 months, if it couldnt be rented for some reason. How does that math not add up unless you are paralyzed by fear of risk.
Again, he lost and now hates risk. Risk tolerance is like a muscle that needs to be exercised and built up. I would never take uncontrolled risk. There are ways to control risk, and believe me, I would never invest a dollar in the stock market before investing it in real estate. The stock market is risk, real estate is one of the most solid investments available. Well, I take that back, go ahead and feed your safe money market or CD or just leave it in the bank for your 1-2%, by risking a little you can gain alot. I believe a life without risk is dull.

Anyways, I could ramble on forever, but thats it for me tonight...

*anathema*

[+Donny]

Ah yes, 'what if the mortgage isnt paid this month by my tenant?'. You could evict, or you could set up a program where they know you mean business. You could say, 'rent is $1150, but I will knock $150 off if its paid on time'. Simple really. People will pay on time more often, they dont want to loose out on this 'deal'. You cant stop people from not paying sometimes, you just make sure to have a 'reserve fund' set up that will carry you and your properties for 3-5 months if needed.

I wasn't referring to bad tenants, though that should be factored in; I was referring to just not having tenants at all. There is no guarantee anyone wants your house at the given time. What if real estate value goes down in your area? With all that money tied up in mortgages, you are in for some real trouble.

Very good scenerio, I have seen it many times before. From a pure 'investment' standpoint, you can only buy $100,000 of stocks or CDs or bonds or money market funds with $100,000, right? Investing that same amount into real estate could get you $1,000,000 worth of property, just like you said. From a financial standpoint, your one house you bought outright for $100,000 could be making around $800-1200/month, depending on rents in the area. lets just say its $1000 for this arguement and you are making 12% return on your investment before expenses!! Still better than the bank/CDs and the stock market (which is much, much riskier). Now take your 10 houses that cost you $10,000 each to get into, and are making $1000/month each like the above single house example. Well, your $100,000 investment is now making $120,000/year, or 120% before expenses.
Which is better? With controlled risk, it is possible.

Key phrase: "before expenses". Sure, the gross income looks great, but what about the 10 $90,000 mortgages you have to pay every month? Furthermore, the odds of you being able to constantly rent 10 houses is lower than 1, so you probably have to figure you will at least have one house with no tenant. There are going to be more people missing rent with 10 houses, vs. 1, which you need to factor in. Furthermore, there is more time and energy put into the upkeep and management of 10 properties vs. 1.

Nope, thats after expenses, not counting equity. Thats pure income, cash in the pocket...

After the monthly payment on the $3 million debt?

As an investor, I aim to get $20,000 equity when I buy. I would not buy a house for $95,000 that could be sold for $100,000 as a rule. Unless the rents in the area were $1500/mo or the area was appreciating over 15% or some other creative investment reason, I wouldnt touch it. I am looking for discounts.
My first property has $35,000 in equity when I bought, only took $300 out of my pocket to get into (for an appraisal), and the area is appreciating 22%.

Okay, yes, that makes sense. Are you looking to get rental properties, or are you looking to make your money from equity? IOW, are you primarily looking to buy and hold properties to get rent out of them, or are you primarily looking for good buys from foreclosures and things, and just renting them while you wait for the appreciation and chance to sell? It seems the latter may fit in more with a scheme that involves more debt, though I hardly have enough knowledge to say with much confidence.

Very good point. For a mere 6% of the income from the property, I could have a management company do all the 'toilet fixing' and renting etc. for me. My goal isnt to be a landlord, but an investor, only worrying about the next deal.

Okay, this I didn't know. We have to factor this in above.

Another great observation, and yes there is this factor. While there are very powerful ways for deals to find you (my friends phone barely stops ringing with deals), finding the deal is actually very fun for most of us. It beats a 9-5 office job for sure! Just keep on top of your local market, get to know some like minded people, and you will take care of knowing when to sell/buy/rent/lease-option/etc.

I definitely agree here. If I wasn't going to school to become some sort of teacher/church minister, my second choice was pretty much definitely going to be real estate. Real estate, as a general rule, is always going up in value. The whole limited supply combined with the almost ever-increasing demand is usually pretty good.

The best observation yet, saying 'i will never get a credit card' is dumb in this day and age. There is lack of financial education in this country, my parents never taught me about credit or investing. Let along budgeting/saving. I feel cheated, and will absolutely assure that my kids will be experts on the subject. I plan to have my kid buy a house when he goes to college, rent out the other rooms and live free in his house while going to school and building his credit along the way.

If I had the money, I would probably do that. However, in my present financial situation, combined with the fact that I have to live on campus, I can't. That is a great idea, though.

So true. But many many businesses start with a business loan or some sort of capital to fund it. I just got through reading a great book about starting/owning a business. Loved it.

Yes, start with a loan. In those businesses, one of the objectives is to eliminate fixed costs, which means eliminating that type of debt.



BTW, pm me when you get this. I have been looking for investing advice for quite some time and believe you could help me a bit.

[anathema]

I wasn't referring to bad tenants, though that should be factored in; I was referring to just not having tenants at all. There is no guarantee anyone wants your house at the given time. What if real estate value goes down in your area? With all that money tied up in mortgages, you are in for some real trouble.

Key phrase: "before expenses". Sure, the gross income looks great, but what about the 10 $90,000 mortgages you have to pay every month? Furthermore, the odds of you being able to constantly rent 10 houses is lower than 1, so you probably have to figure you will at least have one house with no tenant. There are going to be more people missing rent with 10 houses, vs. 1, which you need to factor in. Furthermore, there is more time and energy put into the upkeep and management of 10 properties vs. 1

Ok, now I understand. Yes, this is called vacancy rate, it is the % of the year the house will be absolutely empty and is factored into the expenses. Lets say a house has a year long lease on it, and the tenant decides not to renew. Even if you had another tenant lined up, you would have to take time to clean the property etc etc. Or like in your example, lets say it takes you 2 weeks to find a tenant. Then your vacancy rate is 5%, and is deducted from the potential income. You dont want to try to guess this number when analyzing a property, call around to realtors and property management companies and ask what the vacancy rate is for that area. Some places have 10%, which isnt great, but can still work if the other factors of the house cover this expense and the risk isnt too great.
.

After the monthly payment on the $3 million debt?

Yes, again. They paid their expenses on the properties, their debt service (mortgages), and this is pure income that goes into their bank.

Okay, yes, that makes sense. Are you looking to get rental properties, or are you looking to make your money from equity? IOW, are you primarily looking to buy and hold properties to get rent out of them, or are you primarily looking for good buys from foreclosures and things, and just renting them while you wait for the appreciation and chance to sell? It seems the latter may fit in more with a scheme that involves more debt, though I hardly have enough knowledge to say with much confidence.

Hmm. Who says you cant have both? Knowing several investment strategies will dictate what you can do with a certain property. Lets say the house is perfect for a 'buy and hold'. Dont you still want to get it at a discount?
I was taught this model: 2-20-2. You want to try to have the property to give 2x the initial cash investment over a year (like my $300 down, I would have easily had this back and more at the end of the year). Then 20k in equity for a safety net and profitability. If you have unforseen expenses (oops, it needs a new roof..), you have equity to tap and are still on top. Then you want the property to cashflow at least $200/month. Cashflow is what is left after expenses and debt service (mortgage). 2-20-2. (or 2x-20k-200 i guess would make more sense) It dosnt have to meet all of these all the time, but at least two, and it must be exceptional to still be a good investment and only meet one.
Buying property and fixing it up to sell would be handled differently then buying it, fixing it and renting it. My goal is to know what to do when every opportunity arises. I was closing on my first house, when another one came my way. Knowing I probably couldnt handle buying and holding at the time (in the middle of loan process on the other one), I called an investor friend and he took the deal off my hands for $2000 to me. While not ideal, it shows that you dont have to have the debt service to make money in real estate. If you find a great deal, someone will be willing to take it off your hands for a price. Also, there are a few ways to aquire property without even getting a loan on it.

I definitely agree here. If I wasn't going to school to become some sort of teacher/church minister, my second choice was pretty much definitely going to be real estate.

You could supplement your income on the side of course! Or buy a nice 2-4 unit building and live 'free' for you and your family. I saw this sweet property a few months ago with a 5 unit and a nice 2000 square foot house on it. The 5 unit would more than pay for the entire debt service, and you could live in a nice house for 'free'..

Real estate, as a general rule, is always going up in value. The whole limited supply combined with the almost ever-increasing demand is usually pretty good.

So true, I saw a great graph in a book about real estate prices/returns vs. the stock market ever since the big crash in 1929. Real estate only went consistently up, while the stock market had HUGE ups and downs. Where would I rather have my money? Even if they 'naysayers' are right, and there is a real estate bubble (which I dont believe BTW), investors can still make a living in the up market AND the down market.

*anathema*

[+Donny]

Ok, now I understand. Yes, this is called vacancy rate, it is the % of the year the house will be absolutely empty and is factored into the expenses. Lets say a house has a year long lease on it, and the tenant decides not to renew. Even if you had another tenant lined up, you would have to take time to clean the property etc etc. Or like in your example, lets say it takes you 2 weeks to find a tenant. Then your vacancy rate is 5%, and is deducted from the potential income. You dont want to try to guess this number when analyzing a property, call around to realtors and property management companies and ask what the vacancy rate is for that area. Some places have 10%, which isnt great, but can still work if the other factors of the house cover this expense and the risk isnt too great.
.

So really one cannot really say whether buying 10 houses or 1 house with $100,000 is necessarily better. I suppose it will mainly depend on loan rates, the rental market, vacancy rate, and a number of other variables. One thing that seems sure, though, is that if you are going to get the 10 houses, the income needs to be significantly better due to the vastly increased risk.

Yes, again. They paid their expenses on the properties, their debt service (mortgages), and this is pure income that goes into their bank.

Wow, pretty impressive.

Hmm. Who says you cant have both? Knowing several investment strategies will dictate what you can do with a certain property. Lets say the house is perfect for a 'buy and hold'. Dont you still want to get it at a discount?

Well, yes, they both mix, but it seems that you will look for slightly different dealings depending on your strategy. Or I suppose you could look for both, yes, but I figured certain investors would specialize in one or the other, if the market were big enough.

I was taught this model: 2-20-2. You want to try to have the property to give 2x the initial cash investment over a year (like my $300 down, I would have easily had this back and more at the end of the year). Then 20k in equity for a safety net and profitability. If you have unforseen expenses (oops, it needs a new roof..), you have equity to tap and are still on top. Then you want the property to cashflow at least $200/month. Cashflow is what is left after expenses and debt service (mortgage). 2-20-2. (or 2x-20k-200 i guess would make more sense) It dosnt have to meet all of these all the time, but at least two, and it must be exceptional to still be a good investment and only meet one.

Let me try and apply that to an investment my dad (well, sort of my family) has been thinking of. Buy a most likely foreclosed, run-down house for roughly around, say, 60k that should be worth around 100k when fixed. My dad used to be a carpenter, so he can fix it himself. It would obviously depend on the state of the house, but a good estimate I think would be around 10k to fix it up. So, after fixing it, you are looking at a 70k investment and a 100k house, which means 30k equity. That meets your second requirement. I think his plan was to put around 20k down (which actually wouldn't be his money; my sister would be helping out, too, but for now, we will treat it as if it were his), making it a 40k mortgage. After the month or two of fixing it, you are looking at probably around $1000 rent against the 40k mortgage, which should easily make the $200. However, the first requirement, making back double your down payment, wouldn't work unless the house was sold after the repairs within the year, as there would have been 30k put into the house (20k down payment and 10k for repairs).
Of course, the market we are in right now is a buyer's market. Tons of foreclosures, so buying a house like this wouldn't be a problem; it's selling it if within a year, if he wants to, that may cause a problem. I think the rental market isn't too bad, though, so it may be a better "buy and hold" investment, at least until the market turns around.
This is also unfortunate because we are sitting at around $50-60k in equity in our present house, if the market was better. We bought a 100k, typical 3 bed, 2 bath suburban house 7 years ago and added on a second story with a bedroom, office, and what could be turned into a bathroom (again, my dad built it himself, so it was low cost). It was assessed not long ago at around 155k. Because of the present market, when he tried to sell it, he failed pretty badly. He probably would have to sell it for as low as around 130k right now, which loses too much of that equity. However, he may have to sell his house soon because of job issues (they may want to either relocate him or lay him off), so that kind of spoils that investment.

You could supplement your income on the side of course! Or buy a nice 2-4 unit building and live 'free' for you and your family. I saw this sweet property a few months ago with a 5 unit and a nice 2000 square foot house on it. The 5 unit would more than pay for the entire debt service, and you could live in a nice house for 'free'..

I would definitely consider dabbling in it if I have the time. Ideas like that are what makes it sound like a really fun job.

So true, I saw a great graph in a book about real estate prices/returns vs. the stock market ever since the big crash in 1929. Real estate only went consistently up, while the stock market had HUGE ups and downs. Where would I rather have my money? Even if they 'naysayers' are right, and there is a real estate bubble (which I dont believe BTW), investors can still make a living in the up market AND the down market.

Yeah, there is a guy in my church that is a big real estate investor that says the same sort of thing.

[Benny Hicks]

Originally Posted by anathema

Well, I take that back, go ahead and feed your safe money market or CD or just leave it in the bank for your 1-2%, by risking a little you can gain alot.

He advises investing in mutual funds, which have a far higher payback rate than 1-2%. The more stable groups guarantee a 10-15% payback.

Obviously you know more about economics than I do, however, so I digress.

Ben