Posted at November 19, 2020 Posted In Uncategorized

“Give me a lever long enough and I shall move the world.” – Archimedes

While there are several reasons investment real estate deserves a place in nearly anyone’s portfolio, I’d like to focus on one that can be misunderstood.

It’s safe to say most of us are conditioned to avoid debt. When we think of being a responsible member of society it typically means we aim to live within our budget and avoid buying shiny objects or gadgets we don’t need and can’t afford by using credit cards aka “bad debt.”

Being resourceful with our funds is terrific however we may want to avoid taking things to an extreme.

Though we can all agree having a balanced budget at home is a good thing and the “bad debt” of owing money on credit cards typically isn’t beneficial, is there such a thing as “good debt?”

What about a mortgage?

A mortgage is considered “good debt” for investors because it solidifies the total amount owed. We then use future dollars (which are worth less than today’s dollars) to pay off the note. All the while it’s the tenant who is using the house but not owning it who is making the payments.

The tenant benefits from the use of the house, the investor benefits from cash flow, and appreciation.

Below is a theoretical Rate of Return Comparison highlighting the benefits of utilizing “good debt.”

  1. Larry decided to buy a Mutual Fund from the local broker and let a portfolio manager bet on what stocks and/or bonds might do well. He starts with $100,000 and after time ends up with $110,000 giving Larry a rate of return of 10%.
  2. Mo decides to do something different and purchases an investment property for $100,000 and after time the house is valued at $110,000. Down Payment + Closing Cost = $25,000Did Mo get the same return as Larry? No, because Mo has leverage in the form of an $80,000 mortgage.$10,000 gain divided by $25,000 gives Mo a rate of return of 40%.

Who was the biggest loser in this scenario? The answer is C, Curly. Curly invested in cash to earn what felt like .0000000000000000000000005% interest in the bank or even worse had to pay the bank a Negative Interest Rate should Curly happen to live in Spain for example.

The monetary system in which we currently reside uses Keynesian Economics with fiat currency. The combination of these unfortunately means we must keep expanding the money supply. Sadly, this system punishes responsible people with a “safe” mindset who try to protect their purchasing power in cash.

One question to ask yourself is How much of something they make more of everyday do you want to save? Is it wise to save 100,000 widgets because you’d like to keep them to trade for something else if the factory that makes these widgets can conjure up another 3.3 TRILLION of them on a whim?

Recent Balance Sheet Trends of the Federal Reserve

Now, I’m not saying not to have cash.

I’m simply stating that in practical terms it is impossible to either to save your way to prosperity or preserve your wealth over time in a savings account.

If you’re interested in learning more I’m happy to assist!

Our mission is to help passive investors become financially free by providing high quality alternative investments — if we can help you in that way, it would be an honor to do so. Feel free to schedule some time for us to chat.

Until next time…

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