How to escape the mindset??

Question

So I’ve purchased my first rental, it appraised way above value as is! I used that to get an appraisal line of credit, will use that money to spruce it up then refinance and cash out! Heck of a first deal thank God. My thought is, how do I get out of the mindset where I mind that I have debt. I know I have positive cash flow  and that’s good debt but debt is debt. I’m always thinking well what if for some reason one of the homes I have doesn’t rent out, in that case it’s just debt. What do y’all think?

Account Closed · Answer

Sorry, its not just about reading that con artist Kiyoskai's book. The way to think about it is risk management. Debt represents risk. You have to take some risk to make a gain. Whether its risk of capital you already have or capital you don't (which is debt). So how much risk should you take and for what returns? What does that risk represent of your total financial situation. So should you take the last 10K out of your account and put it into a 100K rental? I would say the risk is too high. Should you borrow $100K for a $500K property when your net worth is $2M? Sure, that's a manageable risk. Also what is your income relative to debt payment? If the mortgage is 10% of your income and you have some faith in the security of that income, its not a big deal. If its 40% of your income and your job is shaky then not so much. Its a lot of factors, not a black and white issue.

Ali Boone · Answer

How much education do you have on finances and debt? I think the more education you have on it, the more your mind will get on board with it being okay when it's good debt. Good debt is not only essential if you want to grow your portfolio, but it's... good. The Rich Dad books are great for understanding good debt better.

Mike S. · Answer

Good debt is not just positive cashflow. It is positive net worth. Meaning, if you had to liquidate your assets, you would have cash in excess of your debts. You should be worried for example, if you are upside down with what you owe vs. what its worth, even if you are making positive cashflow. The first wave of a recession will wipe you out.

My advice is pay down the mortgage until you have about 20% equity in the property, and then either go with an interest-only fixed-rate loan, or open a HELOC in 2nd position so you can access your equity like cash. The reason 20% is a magic number is because in the past several recessions, 2008 was the worst, and still property values only lost 20-30% of their value from peak to trough. 30% was in areas like California, with most other states at 20%. Some states like Colorado and Texas lost no value, for political reasons. But anyway, that's your nightmare scenario. All you need is enough padding to be able to sell the property in any market without being desperate or having to come up with cash out of your pocket to close.

There is little sense in paying off the mortgage and owning it outright. This has to do with the inflation rate, the future value of money, and compound rate of return. In short, you are better served to use that money [you would have paid down the mortgage with] instead as a down payment on another investment.

Ketan Patel · Answer

@Marco Morkous You also want to make sure that the real challenge under the hood is not FEAR! Too often when you are on your way to growth, little uncertainty, and fear comes with it naturally. So you ZERO in on the fear of house not renting or whatever the case may be and resolve it vs. understanding debt and all. Just another angle to look at it

Ana Marie B. · Answer

@Mike S. - Your last paragraph really hit the nail on the head. Well-said/ articulated.

John Collins · Answer

Start camping in your backyard and giving yourself the mentality that you're still a kid, you'll always be a kid, and stuff isn't important. Cuz your mentality is pretty silly and holding you back but when you're not attached to stuff you'll be a lot more clear with what you want to do. I've never wasted a second worrying.

Kanwar Sodhi · Answer

You need to read Rich Dad Poor Dad; it'll answer all your questions.

If you still have the same questions, you need to read it again until you understand it

Guifre Mora · Answer

I don't know if your mindset is because of what's happening right now or you need a kick in the...

Let me ask you, in line with your thought process ... what's not Debt? Is your car payment not Debt? is rent not Debt?

But Every time you pay the mortgage a portion of it is principal. Yes, there is Debt in the form of interest. But you gain equity every month. Whether you pay out of pocket or your tenant pays the mortgage you are always earning equity witch is an asset.

How to escape the mindset??

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