Wednesday, March 14, 2012

debt and debt - part II

I hear some of you nay-sayers still shaking your heads and wagging your fingers at me for my "reckless" borrowing.

But here's the short of it...  How is it any different borrowing money to buy a house then rent it out?  You're taking on a huge tenant risk, and housing market risk all yourself.  If the market tanks you're left with negative equity in your home.  (Your mortgage is bigger than the value of the home)  Or if your tenants walk away, or tie you up in court or with the municipal tribunal you're still on the hook making your mortgage payments, gas payments, water payments, electric payments, insurance payments, and property taxes all the while they continue to live in your property and NOT pay you.

Most of the money I've borrowed has been used to buy REITs.  (Real Estate Investment Trusts)  So they do the work dealing with tenants, taxes, insurance,  repairs etc. all the while paying out the profits to the share holders.  Yes, I am still exposed to all of the above risks, but the risks are mitigated because REITs generally have dozens to hundreds of properties with dozens to hundreds of tenants. And yes if the real estate market explodes they generally go down too, albeit more slowly so I've got a much easier way of getting out rather than having to sell a home at a loss in a buyers market.

So yes, the risk/reward ratio is way smaller but the bank charges me 4% to borrow and many REITs pay out 5-8% in distributions.  So the difference is mine to keep all with very limited direct risk and with no need to go repair exploded/frozen water pipes, or toilets at 3 am.

So on average I'm getting 3% for doing little on money that's not mine, plus the interest cost is tax deductible against my earnings.

So Invest my friends.  You don't have to borrow to do it, but in my opinion it makes a very compelling argument of you chose to do so.

That's how the rich get richer...  You can start yourself on the path to riches too.  It never hurts to get a sweet gig that pays you hand-over-fist, but as a starving artist chances are your value may never be understood or appreciated during your lifetime.


  1. I don't really get it, and maybe that's because I have limited knowledge of investments such as this, but why take out a 4% loan for a 5-6% return? Wouldn't that essentially translate into a 2% return, which you can get on some ISAs and mutual funds these days? Feel free to ignore if this question made no sense.

    1. You're not quite understanding what's going on...

      If I have ZERO dollars to invest you don't get anything for that.

      But if you have access to credit (which is debt) and can invest that at 7-9% and only pay 4% interest on the debt then you're making money on money you never had.

      Does that help?