Quote:
Originally posted by fantasyman
IMX did you ever hear the expression "the road to hell is paved with good intention"?
That what can happen when you live above your means by using your assets to leverage against.
In a few cases, borrowing money can give you the added cashflow necessary to maximize your ROI. In most instances though,borrowing money is what gets you into trouble.
That said, yes, taking a loan out to purchase a house is how to get started. But you should have a plan to pay down your mortgage faster than the terms of the loan by making additional payments against the principal each month. Otherwise, you will pay twice as much money for the house, just look at a truth in lending paper on any mortgage. If you make the monthly payments for 15 or 30 years the only write off you have is the mortgage interest.
It also depends on your age. If you're young, purchasing a house will be your largest investment and will help you start accumulating wealth thru equity. Once you have equity in your home, you can get an equity line of credit on your home loan so that when you purchase a car, you purchase it by taking additional loan against your house equity. This way you can deduct the interest you pay out for a car. If you just take out a loan on a car, you can't deduct any of that interest.
Be very careful not to borrow money you can't afford to pay back or you will lose all of you assets by defaulting on a loan. This has been the demise of many wealthy people, leveraging everything they have to live a better life style. When they finally can't afford to service their debt, they lose everything and who is the benefactor? The bank or lending institution ends up with all the assets you worked so hard to acheive.
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FM--
Yes, I understand you should avoid loans on consumer durables, and items such as vacations meals etc... Those should not even go on credit cards. Or you should set-up you credit cards to immediately pull the full payment out of your checking account. In that way you collect Credit Card bonuses, and improve your credit rating at the same time.
Borrowing on personal expenitures gets you in trouble quickly; however, so does spending the money you make in uncertain business ventures quickly. Even if it is your money, income from adult ventures (just as an example), are fairly uncertain from one year to the next. If a guys income falls drastically, it isn't going to matter that he owns a lot of consumer stuff out right...he probably shouldn't be buying the stuff until he has a stable income stream.
(wise man, your dad sleazy ;)
However, make no mistake, I'm talking about biz ;)
In business, not all of us have the ability to create our own luck right from the start ;) To pay for start-up expenses without the use of loans to get started. Adult seems to be an exception, as a lot of the start-up is intellectual capital and the balls to act on your knowledge once you have it.
But in other business I'm researching, I'll need some loans to get things started and cover basic operating expenses until the cash flow is there. It doesn't mean they are bad investments b/c I can not afford to start them up out right. In fact the ROI is higher than adult, problem is the start-up costs are expensive, to lock the small industry down like I want to, so I can extract some monopoly rent in the long-term ;)))
However, in Real Estate. The big boys use leverage to acquire more property, build more property and remain diversified away from having all their investment money in Real Estate or even tied to a few specific real estate projects. (Hence REITs, real estate partnerships etc..)
Banks do not want your physical assets, most will do almost
anything to avoid foreclusing on consumer property and commercial items--as you said the resale value on a Ferrai is next to nothing--and banks are not in the business of car or home sales. They dump that stuff for pennies on the dollar. In fact most banks have it written in their operating statement how long the can keep property before auctions. In fact, if you can get in good with your local bank...
(By the way foreclosed properties are great investments).
As for risk, yeah definitely it is there, anytime you own something outright there is less risk than with leverage. However, the total ROI is higher and holding all else equal, by using loans that max your overall rate of return on each real estate project, you will make more money. You just need to equate the increase in risk, with the increase in return.
If I get a chance to buy a 200k appartment building, I'm putting as little down as possible, trying to get seller/builder financing (hopefully the seller is motivated) etc...and concentrating on increasing the value of that property in the first year to increase my equity in the building. Pocketing from the cash flow from the property is secondary concern for me, I'm interested in getting the unit to pay for itself, with minimum $$ down. 5-years with equity from payments and appreciation, I'll extract my profit then with another refinance.
Risk is inherant in any project, it could always fail.
Just because you own it outright doesn't mean that you can't lose your shirt.
Using leverage increases your ROI, but it also decreases the projects you can invest in because you will need that rate of return to cover the debt service.
Bottom line, leverage allows you to be more aggressive with a winning strategy. Of course, if your strategy sucks, you are going to lose far more than you would have if you were buying outright.
But such is risk - reward.
Definitely words to live by though FM Invest Invest Invest, and only at a risk level you feel comfortable. ;)))
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