[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.

[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.

[an]

[quote=CA renter]Grants, scholarships, jobs, living at home, etc. while in college can all help to avoid student debt. In my family (all college educated, and most with graduate degrees or post-graduate credentials, etc.), very few have had any significant debt upon graduation (maybe $10K or less) because everyone did the community college->state university->more specialized/more expensive university for graduate work, if necessary. Everyone also worked their way through school, and most of us had a lot of full-time work under our belts by the time we graduated. This usually meant that it took longer than the standard 4-5 years for an undergrad degree, but we all had real work experience upon graduation, and this ended up being every bit as valuable as the pieces of paper in our hands.

As for small business owners, in many cases they can work their way up slowly, using profits to build up and expand their businesses. Others we know entered into partnerships and/or created privately held corporations and distributed shares to start-up investors.

Mortgages are okay, but I wouldn’t recommend borrowing more than 80% LTV, and would not recommend leveraging up to the max one can afford. Leverage is good when it’s going your way, but it’s probably the most common way so many “rich” people end up broke.

Yes, small amounts of *self-liquidating* debt can be helpful in some situations, but even in these cases, the people I know who managed to avoid the financial highs and subsequent crashes that so many experience were the ones who were always very, very conservative where debt and leverage were concerned. Most have made a point of avoiding, or at least minimizing, the debt they took on…and it was almost always “productive”/ self-liquidating debt, not consumer debt.[/quote]You’re talking about exception here. On average, that’s not the case. That’s why there are plenty of sayings, such as “high risk, high return”, “no guts, no glory”, etc. Bottom line is, you need debt to get anywhere close to be financially independent.

As for small businesses, most do not work up slowly. How are you supposed to open a restaurant by working up slowly? How much do you think it cost to start up a business like a restaurant or a electronic manufacturing business? Some of the equipment they need to even start the business cost hundreds of thousands. How long do you think it would take for someone to save up hundreds of thousands?

You say mortgage are OK but mortgage is a debt and for most, it’s the LARGEST debt they take on. So, you can’t possibly say: [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] then turn around and say mortgage debt is OK. BTW, 80% is a HUGE number.

You’re right, leverage is good when it’s going your way. That’s why there are saying like “high risk, high return”, “no guts, no glory”, etc. You take the risk, knowing that if things doesn’t go your way, you’ll be in a world of hurt. But on the flip side of that, if you don’t take the risk, you’ll never be financially independent. If you’re content to be in perpetual mediocrity and be dependent on your boss, then feel free and stay debt free. But for those of us who are trying to be financially independent and did not win the ovary lottery, we have to take those risk and leverage to get us there.

You like to point out that there are those who got burn due to leverage, but I also like to point out there are far more people who greatly benefited from leverage. I also like to point out that most of those who are debt free all their life tend to be renters. You can’t be debt free and little debt all of your life and own a home. We’re talking about needing to have hundreds of thousands in debt to buy your 1st home. Who do you know that buy their first home for cash from which they saved?

BTW, how many in your family is a doctor? How many in your family live in a city/town w/ no real good college? I’d like to see a single doctor who graduated debt free for w/ <$10k in debt w/out parents paying for part or all of the cost.

[an]

[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]
That’s the funniest thing I’ve read in awhile. I guess all the doctors who had hundreds of thousands of student loan were unsuccessful. How about many many white collar workers who didn’t have a silver spoon who had to get student loans to get their BS/MS/PhD. How about the many small business owners who got their first business loan to start their businesses? How about the many small business owners who got more business loans to expand their business? How about the millions of people who got a loan to buy their first house, then their 2nd house and rent out their first house, then their 3rd house and rent out their 2nd house, etc? I can go on but you get the point.

[an]

[quote=CA renter]But in your scenario, the person with the paid off house still has the house at the end of that 7.3 years, and will NEVER have to make mortgage/rent payments for as long as he lives in that paid-off house. As his employment prospects pick up going forward, more of his income can go toward investments at a time when prices will probably be exceedingly low as a result of a multi-year depression (which is what it would be if he were totally unemployed for 7+ years) — exactly when you want to be getting back into investing.

Additionally, if the house were a nicer house, it could be rented out and the owner could easily downsize into a tiny apartment in a flyover state, giving him extra income for however long it takes to find employment and move back to his home area.

At the end of the 10.8 years with the “investor,” he is totally broke, has no home, and will be saddled with housing payments for at least 30 years (in most cases), preventing him from having that extra money for investments when it’s most valuable.[/quote]
With my scenario, after 7.3 years, you have no cash to pay for food. How are you going to eat?

If we’re talking about great depression, that house probably will see >50% decline. If you really must have a house free and clear, the $700k house can be bought for cash for <$350k. If you add in $140k from the original down payment, you'd own the same house for $490k vs $700k. Point is, you have the flexibility to do so. While the investor will be out of cash at 10.8 years, the owner of the free and clear house will be hungry for 3.5 years since they ran out of cash to eat 3.5 years ago. Now, if you're 50 and this happen, do you think someone who's in the 60s will be hired back into the work force who haven't worked for over 10 years? Also, we've only talked about a depression scenario. What if we see an inflationary scenario like we saw in 70s-80s? Houses tripped, income increased drastically in nominal term (while not enough to keep up with inflation). However, in inflationary scenario, it would make a lot more sense to pay back $700k with money in the future that's worth less than 1/2 of what it was. Lets look at what would happen if we see a repeat of 70s/80s where you can get CD rate around 15%. If you have $1M, your yearly interest would be $150k. If you paid off your house, your yearly interest would be $66k. After just 5 years, if you must have a paid off house, you can have it completely paid off in 5 years and still have $1M in your nest egg. While with the other scenario, you only have about $770k. So you're already $230k less well off. Going forward, you'll be perpetually in catch up mode compare to if you didn't pay off the house. Lets assume this inflationary scenario happen when you're still working. Your salary would drastically increase while your debt payment stay static in nominal term. So, if we see inflation, you lose if you pay off early. If we have a great depression, you still worse off. I fail to see under which scenario would it be better to pay off the house. We're talking about strictly number here and not the intangible factor of peace of mind.

[an]

My previous post also assume you’re one of the many few who chose to continue to pay your mortgage even when your house went down 50+% in a depression. If you’re like many who just send back your key, your $1M would go A LOT longer than 10.8 years. You just send back your key and rent a comparable place for less. Or you can can be like many who stop paying but still live in the house while waiting for it to be foreclosed. Or you can move to where the job is, or you can move to an area that cost a lot less to live while riding out the storm. Flexibility and cash is worth a lot when you’re hit with something drastic like a great depression.

[an]

I think where you stand really depend on where you sit. earlyretirement is already retired with many investment properties, so I’m assuming he has $xM in the bank/investments as well. So, of course, have a paid off house makes perfect sense. Not because the number makes sense but because he can afford that peace of mind (if having a paid off house give you that).

However, for most people who are not there yet or will never be there, having a paid off house pose a significant risk. Lets take an upper middle class area today and your house is worth $700k and you owe $560k on it. Lets also say you have $1M in the bank, so you have an option of paying off the home or not. Lets take CAR scenario of great depression for example. How long can you live off $440k if you don’t have a job but also have a free and clear home. Assuming your yearly expense is around $60k w/out housing. You’re talking about 7.3 years before you’re out of cash. Depression also mean your house value went to the $hitter so no refi to take money out. Now, lets take a look at what would happen if you didn’t pay off the house today and have $1M in the bank. Your yearly expense would be $60k + $32.4k (housing) = $92.4k. Your $1M will keep you alive and housed for 10.8 years. That’s assuming you make 0% on your $1M or $440k. Either way you have a much better chance of riding through the storm with $1M in the bank and a $560k mortgage than a paid off house + $440k in the bank. If it takes 8-10 years to get out of a great depression, you’d be in deep $hit if you paid off your house (you’d either have to sell your house or drastically change your living standard). If you didn’t pay off your house, you’d have 10.8 years of buffer money.

So, it really depends on where you are in term of retirement savings. A paid off house is not risk free. If anything, I see that as a much bigger risk than having a mortgage.

[an]

Lot B+, house D-. Based on the pictures, the layout seems dysfunctional to me. If I was given that house, I’d probably tear it down and rebuild from scratch to take more advantage of that view.

[an]

[quote=flu]ou know, if this was one of my buckets of investment. Whatever the money I had in that bucket, I’d take it offline and park it for the rest of the year. 13% beats your 3.75% mortgage +/- .50% Good enough for the rest of the year….[/quote]
I don’t like to park my money in good for nothing savings account making 0%. This is my RE play and I think RE is only starting its up swing. So I don’t expect AGNC to crash. So, I’m counting on the 16% in dividend and whatever growth it would give me. Even if it stay flat for a year, I’m still happy with 16% dividend. 3 more dividend payment for this year would increase my 13% increase to 25%, assuming AGNC stays flat for the rest of the year.

[an]

[quote=flu]I don’t get the fascination in today’s environment with the desire to pay a primary home off early, especially for someone who is young that has still a lot of earning potential and can afford to take risks and still recover.

Economic situation changes, and so does one’s strategy. Maybe decades ago when mortgage rates were at the bendover 10+% rate, there was an incentive to pay off early…But look around. Mortgage rates are 2.5% for 15 years fixed, 3.375% for 30 years on a primary. Equity in primary home is pretty dead (at least until you move out or move up)…In this current environment, why do you want your money just to still there doing nothing?

Phillip Morris pays a 3.4% dividend, AN probably has a few recommendations on dividend stocks that do over 10%, and even the sucky Intel will be paying close to 5% dividend (though, it’s still a crappy company)…And these rates won’t ever change. Someone who is well qualified and who can take advantage of this. Hell, you probably can get more than 3% by buying and selling crap on craigslist.

Paying off early is sooooo old school. Hell, I was part of that old school of thinking. Not so much anymore.[/quote]
I totally agree and that’s my thought exactly. At 3.5% or less, why would you pay it off a day early. To me, it’s all about net cash flow (income – expense). I rather have cash in the bank earning enough interests/dividend to pay for the mortgage than paying off the mortgage and not have much in the bank. You need cash to eat and you can’t eat your house. So, unless you already have plenty of cash to cover all the costs during retirement, I don’t see the need to pay off the house. I bet 10 years from now, we’ll be looking back and telling our kids how lucky we were to be able to borrow at <3-4%.

[an]

AGNC today just closed at $31.48. So, it’s up ~3% over the last month and a half and on top of that, they just paid out $1.25/share in dividend on 12/24. So that’s another 4% (if you’re comparing to the $30.50 price, which was where it was in late november). I bought some at $29, so, between dividend and stock price rising, it’s up ~13% over the last two months. Not too shabby for 2 months. They’re still paying out about 16% of dividend so far.

[an]

I would personally go with a double oven, but that’s because my wife loves to cook/bake. We currently don’t have a double oven and there were plenty of time where my wife said she wish she has another oven so she can bake 2 things at once. WRT the microwave, I’d go with flu and not go w/ the built in. I have a special cabinet/shelf combo that I can put the microwave in (it shelf part was specifically made for counter top microwave), that way, the microwave doesn’t take up counter space but it’s cheap to replace if it breaks.

[an]

[quote=flu]Please buy in 4s. So there’s no additional demand in CarmelV….

Don’t live in CarmelV and don’t live in Mira Mesa. Both places are not worth the price.[/quote]
Especially the West side of both Carmel Valley and Mira Mesa. Both are way over priced now.

[an]

[quote=flu]
AN, the FAA just grounded all 787’s…Stock is down to 72 AH.[/quote]
That’s still only ~10% off recent peak. AAPL is off over 30%. BA’s 2009 bottom at around $45. I might get excited if we see mid 50s, or at least mid 60s. $72 I think is still not that big of a drop.

[an]

This is another kind of medical advancement I’m talking about:
http://www.guardian.co.uk/science/2010/jul/12/cancer-survival-rates-doubled
http://www.dailytech.com/article.aspx?newsid=29669 (better quality of life for some)

[Author]

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