Does debt freak you out?

Question

OK, so...  I've read several books and understand that leverage is *good*.... however... does having a very large debt number ever freak you out?

Unless you are buying very inexpensive properties, a buy and hold portfolio will come with a lot of debt.

I'm just wondering if you are OK with that, and confident in that, and even confident in that if the market gets a little nuts and more people lose jobs.

Thanks!

Ryan Logsdon · Answer

Debt's an important tool.  It's fun to think that because I've taken on a liability - controlling someone else's assets, I'll be able to magnify my actions.  And that's all it is, a tool of leverage.  Debt, in itself, is incapable of increasing your risk, just as it's unable to lower that same risk.

The scary thing to me would be not having goals, plans of action, contingencies in place, and not having a network of trusted friends to gain knowledge from and share experience with.

And spiders. Those are scary.

Michael Quarles · Answer

Debt in general is a necesary evil.

Always run a business which can be turned off like a faucet.

What freaks me out is that my wife is freaked out by frogs.   Omg it's a frog.

Bill Rainsburger · Answer

In the game Monopoly, more serious players mortgage any properties they don't plan to build houses on. This gives them cash to build houses on their other properties.

Debt is just a tool like a chainsaw, and if used improperly it will hurt you just like a chainsaw.

Bill B. · Answer

You already have leverage.  The point that others have already made and that I'm trying to say in another way is that debt it is about degree, and purpose, and self control.  Credit cards paid off in full each month build your credit history, allow you to NOT have to carry cash, and are generally convenient.  Fifteen credit cards all maxed out forcing you to make minimum monthly payments will bury you financially.  The car loan for a Toyota Corolla is most probably in your ability to carry now without losing sleep, but buying a Bentley is probably not prudently in the cards for just now.  (if we stay on BP long enough, and manage our investment debt well, at some point the car loan for that Bentley won't be a problem either!!)  The first half of each example probably does not freak you out and you are using that kind of debt now.  The second half of each example SHOULD freak you out.  Investment debt is no different.  And, as ALWAYS, it is about making sure the deal is GREAT and in a GREAT area.

Robert Joiner · Answer

David Krulac

Only thing left for you to do is to tuck us in the bed and tell us goodnight lol

That was good story

David Krulac · Answer

Karen Mikolainis

Once upon a time there was a real estate investor that had like 50 first mortgages on properties, as well as a few second mortgages, some HELOCs, and some unsecured lines of credit too.  The debt was in the mulit-millions, but no property was financed more than 100%, though some were close.  And the income from the properties was enough to pay all the mortgages, which were all paid on time with no lates.

The investor did not have a job so could not rely on a steady paycheck every other week, plus the investors spouse also did not have a job and a regular paycheck.  And of course there were the kids, and none of them had jobs or regular paychecks either.

This situation went on for years and years and the real estate investor and the real estate investor's spouse didn't lose and sleep over the situation.

The mortgage payments not counting the escrows for taxes and insurance (that's a whole 'nother story) were over a half million dollars, that's US dollars a year.  One day the investor woke up and the very first thought crossing the investors mind that bright sunny morning was, "Hey, I'm working for the banks just to pay the mortgages on all these properties."  Since one of the ideas that this investor had for starting to invest was to not work for somebody else as in a job, the irony of the situation really struck the investor.

So the investor sold some of those properties, and made a concerned effort to pay down and pay off mortgages, not only from the proceeds of the sales, but also from the positive cash flow of the rents.  The last I heard the investor paid off all but 2 of those mortgages, and could pay those off also.  I also heard that the investor and the spouse also still sleep good at night.

Bryan Hancock · Answer

Debt is like speed.  If you can drive very skillfully then you can get where you want to go much faster.  If, however, you don't know how to drive that sport car you can crash and burn a lot more magnificently.

The corollary is that one's aversion to big debt numbers signifies their lack of confidence in their investing ability.  This obviously needs to be balanced to taking on little enough debt to maintain future borrowing capacity and protecting oneself from systemic risks.

Some of the oldest and most experienced investors I know have counseled me that the investors that do well in the long run are the ones that stay the most liquid.  Liquidity equals staying power equals long term greedy.  So being highly liquid and having a heavy debt load isn't nearly as scary as having little liquidity and a lot of debt; be it good or bad debt.

John Thedford · Answer

No debt doesn't bother me. I have a plan of action as well as a plan B. If things go sour, I have other assets to fall back on. Without the added debt I would lose the ability to leverage my assets. Debt is a necessary part of doing business.

Jeff S. · Answer

Think the Donald has another system where he doesn't take on debt anymore since he got caught holding too much.

He says he has lots of cash and very little debt.

Mary B. · Answer

Bad debt 'freaks me out' such as personal credit cards, car notes and other expenses that don't provide any sort ROI.

Good debt such as investment properties, NPN/LPN and so forth have quite the opposite effect.

Kudos,
Mary

Does debt freak you out?

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