10 Things Millionaire Won't Tell You

meatpile, I think the thing many of them look at is that no mortgage completely minimizes risk. For example, there is no foreclosure problem for those with no mortgage. So, if I have no mortgage and I have a physical ailment that causes me to be out of work for three months, I will probably keep my house because I don't owe on it. With a mortgage, not so much.

Yes, leveradge can build wealth (Donald Trump for example) but honestly, I think our current crisis is showing that it is not building wealth for many but creating hardship. For those with cash and no/little leveradge, now is the time they build incredible wealth (according to Warren Buffet at least). Those who are heavily leveradged are just trying to hang on right now.

Yeah, it can definitely go both ways. I am more of a minimize risk type of guy so I naturally lean that way. My math still stands though. That can't be disproven as that is fact. Keeping a mortgage around just for the tax breaks is not a good idea (except in rare very high income cases). Now, borrowing on your house for a business or something may or may not be smart but that dude's comments were around him not paying off his mortgage just for the tax breaks. I'd still go with borrowing on your house for a business is a bad idea but again, I just naturally lean that way.

 

11. If it fucks, floats, or flys...rent it.

 

If you can't pay your mortgage b/c you're out of work for 3 months, you have much bigger problems. You should be able to swing the mortgage without sweating it - out of work or in work. Additionally, if he's that bad off and has no mortgage, he's fucked for the tax bill on his $1.5 million home ( likely $30-$50k per year ) so he's fucked anyway.

Definitely and without exception - if you can't swing a mortgage being out of work for 3 months, don't borrow any more money, and maybe sell your house.

If that guy is $900k in debt for just the tax breaks, he's stupid. If that was the point of that article, it's garbage.

Worst case scenario - that guy can't pay the mortgage, and sells for $600k cash. He'll be fine.

I think you missed my point - and I think it lies in the out of work for 3 months and can't pay the note.

Now the other way to look at it is the guy could just have a $600k house. Still - I'm betting he could do more with that 600k than what a bank would charge him for using it.

There's a BIG difference between having $600k in equity on a $1.5 million home vs. leveraging and re-leveraging zero equity homes with inflated valuations, and then buying other homes with inflated valuations on the same leverage. That's risk.

Having $600k in equity is not even close to the same kind of risk. A guy with $600k in equity is not going to go into foreclosure if he doesn't work for 3 months.

Additionally - financing a business can be risky or not risky in hundreds of different ways. It's best not to make blanket statements regarding what's risky and what isn't. Do you own a business? NOt trying to be a dick, just wondering if I can explain a an issue quickly ( if you own one ), or if you'd likely not quite get it ( if you don't ). In other words - it's more risky to start a new restaurant than it is to play slots. Like about 100 times more risky, I think. However - it's not very risky at all to leverage an asset to provide cashflow or liquidity, such as leveraging against receivables. Except leveraging against receivables carries a high interest rate - whereas providing the same cashflow through using another asset as collateral (home ) is extremely cheap.

I could come up with a thousand ways borrowing money for a business is risky, and a thousand ways that it isn't.

I guess the point of what I'm trying to say is this:

A guy with $600k in equity is pretty safe. A guy with $30 in equity is not. A guy with $600k in equity is safe even if he can't pay the bill ( he would not foreclose ), b/c he can still cash out w/ plenty of cash. A guy with $30k can not.

That article did nothing to explain how the guy got the $$ to buy that house and have $600k in equity, which I bet involves taking some risk and being resourceful. All it did was talk about how rich people manage their richness. Dumb.

FWIW - I'm extremely frugal and low risk. Ask anyone I deal with. Even my accountant laughed at me and said 'hey you've got a line of credit - you're a real business now.' and that dude has a fuckin allergy to debt.

The funny thing is on any given day I usually owe 6 figures in payables to vendors, and I have more than that due to me from clients. THAT debt is high risk, because its repayment is all based on my clients paying me. Net 30 debt. Yikes. That's how the planet spins, though.

I could go on about that - vendors charge 1.5% per month if you're late on the net 30 payables - that's 18%. The credit line is less than 5%. The reason I'm late on payables is usually because I'm late getting paid receivables. So - I charge my clients 1.5% per month and pay .25% per month. Additionally, I could use the fact that I always pay on time to demand either better terms or pricing from my vendors.

Man - I could go on for days.

 

Good thread with some interesting info..

I laughed at this part:

I know our mortgage deduction saved us a crap load in taxes last year so I'm torn on paying it off to fast. What we have been doing is just paying the regular payment each month and then at the end of the year plopping down several grand more to take down some principle. Not sure if that's the best plan, but we did it last year and it appears to be what we'll do again this year.

 

VA, I lollered at that as well. As for the other part, what you saved in taxes is still less than the interest you paid to the bank for it. That was my point. I wouldn't keep a mortgage around just for the tax savings because that doesn't make sense.

Meat, I get what you are saying and I know there are certainly lots of people who are leveraging fine. I probably listen to Dave too much so I just hear the people calling in who used their home as collateral for a new business, the business fails, and now they may lose their home.

Edited to add that yes, I am a partner in a side business that has taught me the hard knocks of leveraging (and partnerships which is a whole 'nother matter). This business was a decent part of the personal debt I had to pay off. It is much better now than it was but it was heavily leveraged and that taught me some tough lessons. So, again, my nature now is to avoid debt completely. Also, I will add that I come to it now as a Christian so that also adds another reason for me to avoid debt. Doesn't mean it can't be used properly (heck, my Church is in debt) but for myself, I've been taught some tough lessons and just prefer to avoid it altogether now.

 

The simple rule is this.
If you're not disciplined and smart, debt is bad. And the VAST majority of people aren't disciplined enough (even if they are, their partner might not be).
If you are discipline and smart, the right debt used for the right purposes can be very good.

Mortgage debt is very good for many people, but those are the same people that manage their money well - they wouldn't take the large cash pool in their hands from having a mortgage and turn it over to a hooker and cocaine party as meat mentioned (he calls me for those on a weekly basis, just gotta say no).
They would take that money and invest it in things that have a return, and the tax benefit is part of that return. I have enough in the bank to pay off my house, but I'd never do it. I pay 4.625% on the loan, and with the tax benefit it's more like 3.5% or so. Meanwhile, I make 8% on average with simple investments of that cash. You can't argue with that math.

That said, most debt is not on an asset like a house. Having car debt is INSANE IMHO - depreciating asset, not tax benefit, and it tempts you to drive stuff WAY beyond your real financial capability. Having credit card debt is for n00bs. As Meat said, you can pull cash out of a house if you're not a moron and have some equity, and you should always have enough liquidity to handle emergency stuff like temporary loss of income or big medical issues...

And for what it's worth, my grandfather was a banker during the great depression and instilled a HATRED for debt in my father, who paid of their house long ago even though he knows this math well. He's paid cash for every car he's owned, we never had shit except a nice house and workable cars even though it was a two doctor family - just kept piling up cash, investing it wisely, but never any debts of any kind.

And I'm just now getting out of that, realizing that SOME wisely managed debt is fine...I'll do an interest only loan on my next house if the rates are still were they are today, the math is just too compelling...

 

You seem like a bright guy so I don't know why you are worried about paying off principal on a house. I'm going to go out on a limb and guess that you are in a good enough situation that you house is appreciating at least 1-2% a year. Proabably more, right? So why put more money into it?

Pay as little as possible to stay in that house if it is working for you. The goal is not to pay it off as fast as possible, that is for CC's and depreciating investments like cars. Put that extra money to work for you, not against you. Pay off debt, don't put more into an appreciating house, it is an asset.

 

I've done several IO loans...some for my residence and some investment properties. Most people cringe at the term interest only but they just don't understand real estate investment.

If you have an appreciating property in a decent market you should pay as little as possible to hold it, be it an investment property or a residence. The appreciation rate even at 1 or 2% will far excede the principal you pay off on a 30 year fixed and you are left with cash to put to work in other areas, even upgrading the propety in question to further your position.

Of course these days are tough but it will turn back eventually and IO's will be money makers for the smart investors.

 

restaurants turn into money pits real quick. i got lucky and sold a lease and goodwill for too much money. otherwise, i would have filed bankruptcy.

 

I get where you are coming from but I was looking at it from the point of having the house paid off before the kids got to college. That will be in 15 years. I have two that will need to go and both will be in college around the same time. I refinance last year into a 30 year fixed and I know I don't want to be paying a mortgage into retirement.