Dow Jones Industrial Average

[gregintenn]

:rofl: Almost makes me nostalgic for the Carter years, when CD's were paying 15% or more. :rofl:

The first CD I bought when I was a kid had an interest rate of 10.55%. I thought that was great (and turns out it was), and I also thought it would always be that way.

[Guest TresOsos]

:rofl: Almost makes me nostalgic for the Carter years, when CD's were paying 15% or more. :rofl:

Yeah and interest rates on a home mortgage were 11 to 13% or more and inflation was double digits, yep I wane nostalgic for those days..

[Guest TresOsos]

In 1929 didn't a lot of people who borrowed money to invest end up jumping out of windows when they got their margin calls when the market crashed.

A large institutional investmernt firm with computer trading algorithms my get by with borrowing money to invest. Borrowing at 0% and investing at 3% and making some money. If your a little guy, you'd better stay close to a high window, your either going to have to jump or someones going to throw you out.

[Hershmeister]

[quote name="gregintenn" post="1088812" timestamp="1388804157"]I'm with you till you get to the "leverage" part. How is having debt on a piece of investment real estate better than having cash invested in the same property?[/quote] Precisely because of the leverage You can take 50k invest it in your home (you have to live somewhere anyway) and have 250k house. You'd take a long long time to save up the money to buy it outright. Having a fully paid 250k house means you have 250k tied up in a very illiquid investment and subject to macro forces you cant control. by borrowing the 200k you preserve your free cash and can invest it spend it or save it - whatever floats your boat. Even if your home never gains any value, you're essentially living there for the cost of your interest as your rent. As to rental properties, i dont have the temperment to be a landlord, but having someone pay for your property seems like a good investment if you are good with people, find good tenants and are handy with repairs.

[tnguy]

I'm with you till you get to the "leverage" part. How is having debt on a piece of investment real estate better than having cash invested in the same property?

 

When the government is printing money like crazy, it distorts the market, creates perverse incentives and causes malinvestments. Borrowing to fund investments "makes sense" in such an environment. It's just a question of what happens when the music stops. I have become a big fan of not carrying debt though. May do it again if we trade up houses though.

[gregintenn]

So if you guys woke up this morning with a free and clear deed to your house in your hand, you're telling me you'd take it down to the mortgage office and borrow all you can against it? Really??!!?

[tnguy]

Well, it is upstairs in a folder in a bookshelf but I have one :). It actually didn't feel a whole lot different making that final payment but it is nice to not have to cut that check each month (well, we were actually doing every 2 weeks before the end)

[gregintenn]

Well, it is upstairs in a folder in a bookshelf but I have one :). It actually didn't feel a whole lot different making that final payment but it is nice to not have to cut that check each month (well, we were actually doing every 2 weeks before the end)

So you and I are on the same side of the fence on this one.

[tnguy]

I got focussed on paying off the house when I looked at a few statements and saw how much was going to interest. I'm not totally against a mortgage for living space since you would otherwise have to pay rent anyway (though people will probably be inclined to aim for a bigger mortgage than they'd be willing to pay rent) and it's really a personal choice about borrowing money for investment but debt has downsides that are not necessarily immediately apparent.

 

In the interests of full disclosure, if it weren't for some inheritance, we'd still be paying on our mortgage. On the other hand, we got about half the house we qualified for and were on track to pay off quite a few years early. The two-weekly thing was a scheme whereby you take you monthly payment, divide it in two then pay it every two weeks. That makes an extra payment a year which helps quite a lot. I'd also throw bits and pieces of money in on it as-and-when it was going spare.

 

Paying interest is like throwing money away in my book. If you're leveraging like Hersh says, it may make sense on paper but you have to look at the other factors and see if they are something you are willing to accept. In the case of rental properties, for example, are you prepared for if property prices crash? If you get a deadbeat tennant? If you get no tennant? If a Hells Angel gang moves in next door and scares all tennants off? If you need to move, would you (or can you even) sell at a loss or afford to hold on while things happen slower at a higher price? Don't get me wrong, I'm a landlord myself. It's not always the most fun in the world.

Edited January 4, 2014 by tnguy

[Hershmeister]

[quote name="gregintenn" post="1088999" timestamp="1388851156"]So if you guys woke up this morning with a free and clear deed to your house in your hand, you're telling me you'd take it down to the mortgage office and borrow all you can against it? Really??!!?[/quote] In this environment of ultra low interest rates, absolutely yes. Having that much of your money tied up in a single investment means your give up the opportunity cost of that money. For example - if you have 100k in the market in 2013, you would have earned 29% - 29k before taxes And paying home mortgage interest on that 100k would have cost you @4-5k before taxes. Clearly there is tremendous security in not having to worry about making a monthly payment, and i respect that decision. On the other hand if you feel comfortable in taking a mortgage and balancing that risk with potential rewards. Nothing in life is guaranteed of course and different folks will have greater/lesser risk tolerances. I will reitirate - in a period of government increasing the money supply by printing money, i beleive one of the best defenses is to take on debt. Inflation will make it cheaper in that you'll pay the debt back with inflated dollars. If inflation is a concern - then you win big in a perverse way.

[gregintenn]

In this environment of ultra low interest rates, absolutely yes. Having that much of your money tied up in a single investment means your give up the opportunity cost of that money. For example - if you have 100k in the market in 2013, you would have earned 29% - 29k before taxes And paying home mortgage interest on that 100k would have cost you @4-5k before taxes. Clearly there is tremendous security in not having to worry about making a monthly payment, and i respect that decision. On the other hand if you feel comfortable in taking a mortgage and balancing that risk with potential rewards. Nothing in life is guaranteed of course and different folks will have greater/lesser risk tolerances. I will reitirate - in a period of government increasing the money supply by printing money, i beleive one of the best defenses is to take on debt. Inflation will make it cheaper in that you'll pay the debt back with inflated dollars. If inflation is a concern - then you win big in a perverse way.

I understand where you are coming from now. Thanks. I stille don't believe that's the route I'll go, but I do appreciate everyone's opinions. It can never hurt to learn.

[Guest Lester Weevils]

Yep agreed, assuming that one's income will track inflation. In the past that was generally true, and will be true today for some but not all. If income doesn't track inflation, then the debt servicing becomes ever more painful as increasingly expensive utilities, groceries etc compete for attention against the mortgage payments.

[tnguy]

Your home is not an investment, it's the place you live.

 

And for what it's worth, that didn't come from me or Dave Ramsey, it came from the CFO of a company I worked for which was leveraged to the hilt.

Edited January 4, 2014 by tnguy

[tnguy]

Yep agreed, assuming that one's income will track inflation. In the past that was generally true, and will be true today for some but not all. If income doesn't track inflation, then the debt servicing becomes ever more painful as increasingly expensive utilities, groceries etc compete for attention against the mortgage payments.

 

Very good point.

 

Our first house was a tiny little one-bedroom that was painful to service, expensive due to its location (ten minutes walk to work was nice though).

[Guest Lester Weevils]

http://www.youtube.com/watch?v=mII9NZ8MMVM

[Hershmeister]

[quote name="Lester Weevils" post="1089920" timestamp="1388969596"]http://www.youtube.com/watch?v=mII9NZ8MMVM[/quote] Great video - and sadly reinforces my strategy of having debt in this environment