Can the no debt philosophy really work when it comes to home buying and real estate?
The financial crises, which peaked in 2008, has sent many on a mission to being debt free, and refusing to borrow anything. Some consider this the result of waking up after a decade of debt madness. Others consider the extremes of this to be a poorly led over correction just like property prices went through. So what value is there in really racing to debt freedom and putting off investing or buying real estate? Or is it counterproductive, if not impossible, in the society we live in today?
Dave Ramsey is one of the most visible personalities in the no debt movement. He promotes a ferocious approach to paying off all debt, and staying debt free, even in investing afterwards. The two exceptions in his work appear to be that he recommends against cashing out and selling good assets and investments like retirement accounts (which may be invested in real estate), and that his website promotes for a mortgage company.
Not owing anyone is great, but there do appear to be disadvantages of both extremes. Refusing to take on any leverage at all would mean putting the brakes on all investing for many, or owning much. It would also stop the global economy, and progress in its tracks. Dead. We all know the dangers of over-leverage and being too deep in debt.
It is also worth noting that right or wrong our whole society and ecosystem is effectively designed to keep us in some form of debt. It is virtually impossible to live without it. In America we are technically born in debt. Our only hope appears to be money hacking and time hacking with real estate.
Think about it. Even if we have no credit card debt, student loan debt, car loan payments, or mortgages we still aren’t free of payments. Most will have cell phone contracts and cable TV contracts. If you rent you are just paying someone else’ mortgage, for longer. If you own a home and pay off all loans you still have annual property taxes and insurance. Unless you have (and are allowed to maintain) a completely self-sufficient home which runs off the grid for power and water, you’ll always be married to the utility company bills. Then what about health insurance and taxes. You now no longer have a choice about having health insurance. If you can’t afford it you get penalized additionally by the IRS. Life isn’t debt free. In fact, this may be one of the only 100% for sure things we can count on.
So ‘if’ becoming 100% debt and bill free is impossible in America, then what viable and wise medium is there?
If you take out a reasonable loan, and by a property intelligently, it absolutely makes sense to own a home versus renting. We might not like that, but it is a fact. You can always plow down that balance as fast as you like. Although some certainly argue that maintaining some mortgage balance is smart for taxes and that it is better to keep that cash, or invest it, rather than to lock it up in your own home, as insurance almost invariably appears to fail a great many people when they need it.
When it comes to investing it is really hard for most to get by or get ahead intelligently and safely without some form of leverage. You could put off buying an investment property for twenty years until you can pay cash. However, consider the average home price in some neighborhoods is already over $1M, and growing daily. So smart financing can help to ensure safety with diversification. That means you can by perhaps 3 to 5 properties with a reasonable mortgage loan, rather than just one for cash. Then consider the power of compound interest. Putting real estate to work for you today can add years of compounding growth. That includes while you are sleeping, on vacation, or are sick.
The good news is that the extra income and wealth building from investing in real estate earlier can be used to become ‘debt free’ earlier. You can use those proceeds to pay off your credit cards, student loans, cars, and home mortgage a lot faster. Just don’t go splurging on taking on new consumer debt in the process.
For the few still on the fence about this there are five potential hybrid alternatives:
- Use non-recourse loans (that means you are not personally liable for them)
- Wholesale properties using transaction funding (in and out, and carry no debt)
- Loan the small amount you do have to other investors as a private lender
- Invest what you have in a partnership
- Pool others’ funds and use equity to invest rather than debt
