Over 21% of homeowners in SD County have paid off houses

[CA renter]

AN,

Buying a less expensive home (as you seem to have done) and taking on an 80% LTV mortgage is okay because that’s pretty much the only way it can be done. Still, the debt is collateralized, and with 20% down, you’re less likely to be underwater. We’ve seen what can happen when everybody leverages to the max to buy the first home, the second home, the third home, etc. Everybody ends up losing, even those who were conservative, but whose market was affected by all of the speculation and leverage that was being used.

You say that the majority of people who use leverage benefit from it, but outside of housing/real estate **during normal, non-bubble periods,** I’m willing to bet that most people who use lots of leverage (outside of conservative home loans) end up in a bad place because of it. Do you have any data to show that the majority of people who use leverage end up benefiting from it?

And I disagree completely with your assertion that you have to take such high risks in order to be financially independent. That’s a sure way to go broke, not be financially independent.

[zzz]

CA renter, I don’t agree that the most successful people avoid debt at all costs. I know a lot of very successful 1%ers and they took intelligent, calculated leveraged risks. They are that successful because they analyzed the risks, but were willing to take them and chose wisely. They possessed the skills to start businesses, or invest their hard earned money. They don’t take risks in areas they have no understanding of, but no one has a magic ball, so they take risks. And living at home to go to HBS or Stanford for their MBAs weren’t options, so they borrowed money.

I also know many moderately well off, debt free folks who take no risks, but they are not financially independent, meaning they will have to work at least until 60 or 65 to maintain their lifestyle in retirement. Should adversity strike, illness or loss of job, they might lose most of what they have.

The point is, there are people we can find that fit both the scenarios weve described but ultimately its about everyone’s personal tolerance for risk coupled with the ability to recognize whether you (not you personally, just the you in general) have the smarts / savvy to take them on, or whether in over your head and headed for financial disaster.

I hope to have the balls to take more risks as I personally don’t want to be a slave to the man. I’m currently taking the move towards working independently, but I also know I might have to go back to being a slave to the man. But each person is different as to what allows them to sleep at night.

[an]

CAR,no, taking 80% LTV does not mean I’m less likely to be underwater. Choosing to buy when everyone is selling and selling (or not buying) when everyone is buying makes me less likely to be underwater. I could have bought in 2005 w/ 20% down, but that would put be in major hurt and big time underwater. So, I made the calculated risk to wait. I leverage to bought my primary and I leverage to buy my investment property. Both are up significantly. There’s NO WAY I could have save that much that quickly without leverage and calculated risk. Beyond appreciations, I’m getting over 10% cash on cash for my investment, so every month, I’m getting paid to take that calculated risk and using both my capital and leverage to get me there. There’s absolutely no way I can retire early if I didn’t use leverage. I’m doubtful I can even retire at 65 if I don’t use leverage.

You like to count out housing/home loan but that’s a HUGE source of leverage. Again, you can’t say this: [quote=CA renter]The one difference I’ve noticed between successful people and unsuccessful people (my definitions, not necessarily mainstream) is that the successful people have tended to avoid debt at almost all costs.[/quote]and then remove the biggest source of leverage MOST American use. We’re talking about borrowing hundreds of thousands here, not just a couple of grand. You ask for data, just look at the past and tell me how many people gotten richer by leveraging and borrowing money to buy their 1st, 2nd, etc. house(s). We’re talking about hundreds of millions of people who each borrow hundreds of thousands of dollar and through inflation and fixed interest rates have been rewarded handsomely. I’m sure you can dig up the data if you don’t believe me.

You can disagree all you want but feel free to run the numbers and posted here. My number for financial independence is $5M (nice and round). How long and how much do you think I have to save to get me to that number without leveraging? Assuming I start from $0. A sure way to be broke is to not leverage and depend on the man (when you’re working) and the government (when you “retire”). I can guarantee you most who do both usually don’t have anything left to leave to their heirs when they die.

[Coronita]

The most successful people I’ve met are the ones that inherited a boatload of money directly or indirectly and don’t need to worry about getting to point A because they are already at point C.

For everyone else who is risk adverse, especially in this environment, no leverage/risk means there’s a high probability you’ll not be much further along than what your salary/income produces (after tax of course)…..That means if you want to build wealth, these days, you’re confined to being a doctor, lawyer, Wall Street banker (maybe not so these days), and an Eniginerd that luckily picks a coming with worthwhile stock options. Afterall, you don’t see many mechanics these days living in LJ, Encinita, CarmelV, do you???

You can also eliminate starting a business, because that more than often incurs taking on debt, sometimes far riskier than other types of investments.

Of course, if you happen to be lucky and have a silver spoon given to you already, you don’t need to be concerned about taking risk, because depending on the size of the pot, you can very well live off of it. So no risk taking is necessary in that case.

[Ren]

I can see both sides. Without a catastrophic depression, more leverage (in real estate anyway) over decades will cause you to end up with far more assets and income than focusing on paying off the primary and a couple other properties. At the same time, having a nearly non-existent payment on a primary would enable you to live indefinitely (in a relatively nice place) on menial labor jobs alone, which a big mortgage would not allow. I won’t be sitting around sending out tech résumés for 7 years – I’ll be at the unemployment office asking for temp ditch digging or gas station work. When the entirely leveraged guy runs out of money in 10 years, he’ll be going home to the rented room (or 2-bedroom with roommate) that his minimum wage job permits.

Once our passive income is at a point where retirement is possible, we’ll start putting a lot of extra cash toward the primary.

[earlyretirement]

I do agree with you guys when you say that it’s hard to truly get ahead without taking some risks. That is totally true.

Back when I was starting one of my companies, I had the option to take on debt (loans) or other investor funds (I would have had to give up equity). I didn’t want to do those things as I hated debt but I also didn’t want to give up equity as I was confident of my business plan. I did have to do some VERY risky things.

(1) I cashed in a big chunk of my 401k to start my company and fund operations and also to buy a few investment properties with it.

(2) I quit my corporate job where I worked for a decade and already made Partner and gave up the stability of a guaranteed paycheck to go start up a new company.

For most people doing these types of things above is MUCH more risky vs. taking on leverage/loans. So I do feel it’s important to point out that I too took risks to get ahead.

This was back in my early 30’s before I was married or had kids. No way I would take those kinds of risks now. I also agree with many of you that pointed out the time to take those kinds of risks are when you’re young.

People are posting excellent posts from both sides. I can understand both sides and I don’t think you have to give too big of extremes on either side as examples.

I guess the points are over leveraging can cause significant problems and not leveraging at all will never cause you to get ahead.

[an]

[quote=earlyretirement]I guess the points are over leveraging can cause significant problems and not leveraging at all will never cause you to get ahead.[/quote]This, I totally agree with. I never suggest over leveraged is a good thing. It’s a recipe for disaster. I was just debating the point that CAR tried to make, which is: [quote=CA renter]The one difference I’ve noticed between successful people and unsuccessful people (my definitions, not necessarily mainstream) is that the successful people have tended to avoid debt at almost all costs.[/quote]My point is, you need to take calculated risk and a lot of time, leverage to get you to the point of financial independence.

[earlyretirement]

[quote=AN]. I was just debating the point that CAR tried to make, which is: [quote=CA renter]The one difference I’ve noticed between successful people and unsuccessful people (my definitions, not necessarily mainstream) is that the successful people have tended to avoid debt at almost all costs.[/quote]My point is, you need to take calculated risk and a lot of time, leverage to get you to the point of financial independence.[/quote]

Actually I’ve noticed the same thing as CA Renter. (Not to say that I haven’t met lots of successful people that leveraged as well). But I mostly work with high net worth and ultra high net worth individuals and families and ironically almost none of the clients I work with came from wealthy families or got inheritances.

Most of them are self made type people that started a business, work super hard and lots of hours and also avoid debt. This is not to say that these people didn’t utilize some debt to get ahead. Because most of us at some point in our lives (especially when we are starting out) have had to take on debt.

I can’t begin to speak for CA Renter but maybe the point she was making is these people that she knows really want to get debt free as soon as humanely possible. And once they get out of debt to stay out of debt.

I’ve also seen many yo yo types as she mentioned that start from nothing, get wealthy but then lose it all again. You will see several types like this even people like Donald Trump. Of course he is back on top but many people don’t come back on top again.

As Americans we are very spoiled because it’s so darn easy here to take on debt and get credit. I was amazed after graduating college that banks were lining up to give kids that didn’t even have a job yet tens of thousands of dollars or even over $100,000 in available credit. Heck, on my campus the University was even partnering with credit card companies to offer the students cards.

Student loans, credit cards, car loans, etc. All very easy here. Try going to some countries and you’ll see the credit just isn’t there. There are many cash based societies where it’s almost impossible to get a credit card. You want a car, you have to pay cash or VERY high interest rates. Or even people that want to buy an apartment or house must pay cash. As Americans we’re very spoiled.

Living abroad many years also opened my eyes to just how spoiled Americans are with credit. Many of my friends in other countries have to save up and buy a place once they have the cash. Of course they might have to live at home with mom and dad until they are in their 30’s but they do what it takes to buy things. No one is buying things unless they have the cash in many countries around the world.

In the USA, we mostly live in an “I want it now” society where we have to have the latest gadgets, ipads, iphones, computers, new car every few years, etc. I have had many employees in both the USA and abroad and in most cases my employees abroad made much less than my employees in the USA yet the net worths of those abroad that made much less money are much higher.

[cvmom]

[quote=AN][quote=earlyretirement]I guess the points are over leveraging can cause significant problems and not leveraging at all will never cause you to get ahead.[/quote]This, I totally agree with. I never suggest over leveraged is a good thing. It’s a recipe for disaster. I was just debating the point that CAR tried to make, which is: [quote=CA renter]The one difference I’ve noticed between successful people and unsuccessful people (my definitions, not necessarily mainstream) is that the successful people have tended to avoid debt at almost all costs.[/quote]My point is, you need to take calculated risk and a lot of time, leverage to get you to the point of financial independence.[/quote]

I tend to agree with CAR. My husband and I are relatively risk-averse, have a paid-off house and enough in the bank that we could both retire tomorrow if needed, plus fund the kids’ educations. And we got that way by getting somewhat lucky in our real estate purchases, but mostly by spending much less than we earn.

However, I think our peer group (and perhaps CAR’s peer group) has a different definition of success. I think Early’s financial position is WAY different/better than ours, if I had to guess. So I think the smart risk-taking when young is probably the way to go, if you can. It just never appealed to me, so I think second best (for those of us with maybe fewer smarts or cojones) is definitely the spend-less-than-you-earn-and-avoid-debt route.

[an]

[quote=earlyretirement]
Actually I’ve noticed the same thing as CA Renter. (Not to say that I haven’t met lots of successful people that leveraged as well). But I mostly work with high net worth and ultra high net worth individuals and families and ironically almost none of the clients I work with came from wealthy families or got inheritances.

Most of them are self made type people that started a business, work super hard and lots of hours and also avoid debt. This is not to say that these people didn’t utilize some debt to get ahead. Because most of us at some point in our lives (especially when we are starting out) have had to take on debt.[/quote]There in lie my point. Even your high and ultra high net worth people you know used debt to get started. Do you think they’d be where they are if they didn’t take on debt? I never suggest debt in perpetuity. I too would want to get completely debt free one day. But that day will be when I reach my early retirement goal where I can live off my interest and not have to worry at all about income. Until that day, I’ll continue to try and grow my nest egg and not pay off my primary a day early. Especially when we’re talking about low 2% loan after mortgage deduction. It’s all about income and expense to me.

[an]

[quote=cvmom]I tend to agree with CAR. My husband and I are relatively risk-averse, have a paid-off house and enough in the bank that we could both retire tomorrow if needed, plus fund the kids’ educations. And we got that way by getting somewhat lucky in our real estate purchases, but mostly by spending much less than we earn.

However, I think our peer group (and perhaps CAR’s peer group) has a different definition of success. I think Early’s financial position is WAY different/better than ours, if I had to guess. So I think the smart risk-taking when young is probably the way to go, if you can. It just never appealed to me, so I think second best (for those of us with maybe fewer smarts or cojones) is definitely the spend-less-than-you-earn-and-avoid-debt route.[/quote]Thanks for proving my point. Key point is, you got there by being lucky with your real estate purchases. I assume you didn’t pay cash for those.

Just because you leverage doesn’t mean you have to spend more than you earn. I’ve discuss spending many times before and I’m sure I underspend even compare to most on here. How else would I have the capital needed to leverage? Even if I save 100% of my gross income, I still would not be able to reach my goal of $5M by the time I’m 50-55 if I don’t use leverage. It seems like you got to your number by leveraging as well. If you rushed to pay off your 1st home, would you have the cash needed to buy your second home without needing to sell your 1st home?

[cvmom]

[quote=AN][quote=cvmom]I tend to agree with CAR. My husband and I are relatively risk-averse, have a paid-off house and enough in the bank that we could both retire tomorrow if needed, plus fund the kids’ educations. And we got that way by getting somewhat lucky in our real estate purchases, but mostly by spending much less than we earn.

However, I think our peer group (and perhaps CAR’s peer group) has a different definition of success. I think Early’s financial position is WAY different/better than ours, if I had to guess. So I think the smart risk-taking when young is probably the way to go, if you can. It just never appealed to me, so I think second best (for those of us with maybe fewer smarts or cojones) is definitely the spend-less-than-you-earn-and-avoid-debt route.[/quote]Thanks for proving my point. Key point is, you got there by being lucky with your real estate purchases. I assume you didn’t pay cash for those.

Just because you leverage doesn’t mean you have to spend more than you earn. I’ve discuss spending many times before and I’m sure I underspend even compare to most on here. How else would I have the capital need to leverage? Even if I save 100% of my gross income, I still would not be able to reach my goal of $5M by the time I’m 50-55 if I don’t use leverage. It seems like you got to your number by leveraging as well. If you rushed to pay off your 1st home, would you have the cash needed to buy your second home without needing to sell your 1st home?[/quote]

Good point, we did do mortgages on our first few homes. Then moved around the country with work, selling one and moving up to another. Only recently did we feel comfortable enough with our financial cushion to pay off the mortgage completely.

Judicious use of minimal mortgage debt, as several others have mentioned. But no car debt, student debt, credit card debt, etc…

[an]

[quote=cvmom]Good point, we did do mortgages on our first few homes. Then moved around the country with work, selling one and moving up to another. Only recently did we feel comfortable enough with our financial cushion to pay off the mortgage completely.

Judicial use of minimal mortgage debt, as several others have mentioned. But no car debt, student debt, credit card debt, etc…[/quote]
I agree unsecured debt is generally bad. I don’t have student loan debt or credit card debt either either. But I do have car debt. I can’t resist the low interest rate, especially when I can use that cash to buy investment properties that return 6%+ cash on cash.

My main point is, majority of the people who got to their financial goal gotten there with leverage. Most used mortgages as their main source of leverage. Mortgage is also the only source of leverage that allow you to only put 20% (or less) skin in the game. If I don’t leverage, in order for me to get to my $5M by 55 goal, I would need to save $151k/year and start at 22 years old. I would say that’s nearly impossible. Even if you extend that age to 65 years old, I would still need to save $116k/year for 43 years. That still seem impossible to me.

I have no problem with paying off your house once you’ve reached your nest egg goal. I too will probably do the same. But until then, if I pay of my house earlier, it would be that much harder for me to get to my nest egg goal. Especially when I’m not even at my peak earning years yet.

[Coronita]

AN and I probably have different viewpoints from a lot of people we’re stereotypical asians that don’t typically borrow money to buy crap that doesn’t produce income….If we end up buying crap, it’s usually paid for in cash..Just kidding….or not…or maybe…

But seriously, i think the distinction here is good debt versus bad debt. A lot of people as we know borrow to spend and “gamble” hoping for that one shot deal.

A lot of people do other things with it (or at least try to)…

And the other thing to consider…Money borrowed on your primary is the easiest debt to discharge, as we’ve seen. Easier than credit cards and most definitely easier than any student loan. Whether it’s recourse or nonrecourse it doesn’t matter one flying fvck if you have 1 loan…because in CA there’s the one action rule. As much as we want to believe every venture, speculation will turn out the the way we want it to, one also must be prudent and figure out if crap does happen what’s the shortest way to not owe any of the money you borrowed back. And one definitely shouldn’t drain one’s retirement account at the expense of paying debt back..Because usually retirement accounts (including 529’s) are not within the realm of debt collectors.

[an]

Very well said flu. That’s my point exactly. Leverage is a double edge sword. You need it to get financially independent if you weren’t born with a silver spoon. But you should also be aware of the down side of leverage and use it wisely. But to make a blanket statement like what CAR made is pretty hilarious.

[Author]

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