All Forum Posts by: Brady Mullen

 Well said, Ricardo. :)

It's nearly unbelievable to me when renters say it's not a good time to buy. I want to ask them if they're trying to tell me it's a good time to rent? Cost of goods and services always trickles down to the consumer.

If you think housing is expensive, you don't avoid that because you're renting - you just don't get the equity you're paying for - you're buying it for someone else!

Of course, everyone here probably agrees with this already, but the challenge is how do we help people in our communities understand this for what it is?!

The fact that our children graduate high school having no clue how this works but can probably write out the quadratic equation is mind-boggling.

Good point. It's nearly unbelievable to me when renters say it's not a good time to buy. I want to ask them if they're trying to tell me it's a good time to rent? Cost of goods and services always trickles down to the consumer.  They are paying for it, whether it's to the lender or the landlord.

If housing is expensive, you don't avoid that because you're renting - you just don't get the equity you're paying for - it belongs to someone else!

The fact that our children graduate high school having no clue how this works but can probably write out the quadratic equation is mind boggling.

It's tempting to look at today's interest rates as "high". And it makes sense, since if you were born after about 1985, your only experience with interest rates as an adult tells you that they should be below 5%.

They touched below 5% for the first time ever in 2009, then they plunged below that in 2010 for a little over a decade. This had NEVER happened before. There was a glut of inventory on the market, and lowering rates was a good way to sop that up.

Don't expect this again. It may never happen in our lifetimes.

It's now back to investing and working.  They are no longer passing out homes like Oprah passes out cars.

But here's something to consider. Interest rates are like gasoline. Do I know how much gasoline costs? Yes! I can't help but notice because it's in my face everywhere!

And what would happen if I pulled up next to the pump and gasoline cost me $7/gallon (it's currently about $4 where I am)? Would I sulk and drive away without gasoline? No way! Gasoline is worth about $20/gallon to me, give or take.  Probably more, really.

So I may not like that they're asking me to pay $7, but in reality, it's so valuable to me to get where I need to go so easily, I'm going to pay it happily and be grateful I can get where I need to go in a comfortable vehicle with air conditioning and a podcast and my phone connected to bluetooth so I can talk to anyone I want.

Getting the bank to lend me money to purchase a small business (a rental home) is so valuable. If I insist on cash flowing, I may have to put more than 20% down in Denver, but so be it. Or maybe I endure a few years of negative cash flow, which makes sense.  I'm purchasing a small business and a piece of real estate. Why would I expect that not to cost me something?  Would I like lower rates? Of course I would. Even if I have 3% financing on a property, I'd like a lower rate.  But it's silly to act like I deserve some low rate that existed in the past under very unusual circumstances.

Let's not kid ourselves. The bank financing our purchase of one of the most reliable small businesses that sells a service everyone needs (shelter) is AMAZING!

This could also be said for purchasing your own residence (instead of renting). Don't wait for rates to come down. If they do, refinance, if they up further, you'll be glad you got the rate you got.

The value of this opportunity is unreal at 5%, 7%, 9%, 12%.  Clearly, it's better at 5%, but since that's not available, why are we talking about it?  We are not owed immediate cash flow at 20% down on a great asset...

@James Hamling

This is great.  It's tempting to look at today's interest rates as "high".  And it makes sense, since you were born after about 1985, your only experience with interest rates as an adult tells you that they should be below 5%.

They touched below 5% for the first time ever in 2009, then they plunged below that in 2010 for a little over a decade.  This had NEVER happened before.  There was a glut of inventory on the market, and lowering rates was a good way to sop that up.

Don't expect this again.  It may never happen in our lifetimes.

It's now back to investing and working.

But here's something to consider.  Interest rates are like gasoline.  Do I know how much gasoline costs?  Yes!  I can't help but notice because it's in my face everywhere!  

And what would happen if I pulled up next to the pump and gasoline cost me $7/gallon (it's currently about $4 where I am)?  Would I sulk and drive away without gasoline?  No way!  Gasoline is worth about $20/gallon to me, give or take.

So I may not like that they're asking me to pay $7, but in reality, it's so valuable to me to get where I need to go so easily, I'm going to pay it happily and be grateful I can get where I need to go in a comfortable vehicle with air conditioning and a podcast and my phone connected to bluetooth so I can talk to anyone I want.

Getting the bank to lend me money to purchase a small business (a rental home) is so valuable.  If I insist on cash flowing, I may have to put more than 20% down in Denver, but so be it.  I'm purchasing a small business that will pay itself off.  Would I like lower rates?  Of course I would.  Even if I have 3% financing on a property, I'd like a lower rate.

But let's not kid ourselves.  The bank financing our purchase of one of the most reliable small businesses that sells a service everyone needs (shelter) is AMAZING!

This could also be said for purchasing your own residence (instead of renting).  Don't wait for rates to come down.  If they do, refinance, if they up further, you'll be glad you got the rate you got.

It's undeniable that debt has the power to consume. Anyone who has let credit card debt run amuck can attest to this.

I'm writing this from a place of humility. I have learned some of these lessons the VERY hard way.

But debt can also be a useful tool.

Think about how difficult it would be to get out of the renting cycle and own your home if it weren't for debt (mortgage).

Many smart businesses use debt tactically and strategically to stay nimble and flexible with their resources.

My point here is not to cast a vote for or against debt - it's too nuanced a subject for that type of judgement. I would like to offer some ideas on how to think about it properly and how to control it.

I think of it like fire - incredibly useful and incredibly dangerous.

For starters, my first test a debt would have to pass before I'd consider it would be if the debt will reliably provide the means to repay itself.

For example, if I get a 70% mortgage on a rental property, and if the income will cover the debt obligations, then this is something entirely different than borrowing money to purchase an expensive car just to impress people.

Debt to produce the income to pay for itself not the only metric I'd look at, but it's a good place to start.

This counts for education, too.

If I am pursuing a well-paying job that I can expect to get after completing the required degree, then debt might be a useful tool for that. And if that job provides me the additional income to pay off that debt, then I can see a valid argument for this.

However, if I want a career that pays roughly $60,000 but requires a degree that costs me $80,000, using debt for this seems like chaining a ball to my foot that will be very difficult to remove.

You can get a $60,000/yr job without a degree. If you're skeptical of this, you're either not thinking hard enough or unwilling to consider certain types of very respectable work. Think trades… $60,000/yr is the low end for many of the trades.

If I REALLY wanted that career that required the degree for personal reasons, then there is nothing wrong with pursuing it! But I'd try to get that degree without the debt. It would fall into the "luxury" category, which should not be acquired through debt.

Anyone else got any metrics they use to determine whether a debt makes sense for them?

I have two challenges here.  And I mean all of this with sincere respect.  I'm writing here to help sharpen my tools and have an open conversation.

First, I don't think we can compare what's happening today to the 2008 RE crash.  It is so different in fundamental ways.  There is not 100% financing on stated income loans for everyone, first of all.  And inventory is in a completely different state.  Although those things are related, they are also different.

Second, and this is my more fundamental question, is this - why do people use the term "sitting on the sidelines?"  There is no such thing.  I know that what people mean is "cash", but that is not the sidelines.  This is a cage match - once you have wealth, you're in a ring, not a football field.  There are no sidelines.

You seem to have done well, which is commendable, so I'm not challenging that.  What I am bringing to light is that cash, while it doesn't "lose" value on statements, has lost tremendous value in the real world.

And interest on savings accounts is, by design, almost always less than inflation.

I guess my point is that while buying real estate is not what it used to be, and I don't think it ever will be again in my lifetime, it is still a valid option.  And you can always find reasons not to do something because there is no such thing as a risk-free investment.

What I want to hear when anyone says "don't invest in this" is their recommendation for what they think I should be investing in.  The sidelines is not an option.  Cash is an investment choice that I am not comfortable with for large amounts of my capital.

I like how @James Hamling put it: you can't just buy a paycheck.  Well said.

It's true that it was that way, but holding out for that environment to return with a significant portion of assets in cash seems unwise to me.

Respectfully, I'd rather get $200/mo from a $50k investment in real estate (a down payment on a $200k asset) than 5% from a savings account.  Because I also have a leveraged asset.  If it appreciates by 3% ($200,000 x 3% = $6,000), then I got another 12% on my $50k investment ($6,000/$50,000 = 12%) PLUS the cash flow AND some debt paydown AND tax benefits.

I'd even be willing to achieve a net $0 cash flow before I'd keep my money in cash, even at 5% savings rate. In the REI, I'd still expect some appreciation (eventually), equity through debt paydown, and tax benefits. All of which I'd expect to produce more than 5% annually.

Cash flow is important (especially when I want to stop working), but the majority of wealth in real estate comes from building equity (leveraged appreciation and debt paydown).

I will hold cash for the benefits it offers (liquidity), but I just can't get comfortable holding it as an investment.

I also don't see an asset class as basic to human needs as real estate meaningfully dropping in price when there is a national inventory shortage.

I'll be the first to admit that I don't KNOW what the future brings, but until someone talks me out of it, I'm going to keep acquiring real estate.  In an unknowable future, I'd rather have an asset than a currency.

Thanks, Randy.  I am not making that argument.  I'm just making the point about the important relationship of time in compounding.

However, I'm curious about something else now...  I notice people all over the internet pointing out imperfections in every investment strategy, but I always want to ask what they do recommend?  Because doing nothing is not an option.

I've heard people say things like "staying on the sidelines", but what I think they usually mean is keeping cash.  But that is still an asset choice.  There is no real way of opting out, once you have wealth, right?

If rates are too high, and prices remain "very high", what asset class are you recommending?  Stocks?  Bonds?  Cash?  And I really mean something that the masses can use, not something specifically available to people with particular skills like hard money lending, flipping properties, etc.  Those can be great, of course, but they are not typically something a busy adult can access without any experience.

If this is coming across as confrontational, that is the furthest thing from my intention.  I am sincerely asking your opinion and hoping to have a productive dialog.