I can't wait until this real-estate market collapses.......

[Mr.Coffee]

Originally Posted by SeeGeeWhy

Well, when x = y it is a wash, but consider that you can liquify savings or lend against other investments whereas bad debts just get you more interest payments.

It is a very rare case that interest on a loan is less than or equal to what you would be able to earn by holding your money in a GIC, so it is usually best to pay off all of your loan debts first.

The other thing I don't get is why people accelerate their mortgage payments. If the debt is good and cheap (as Photon mentions above), then why do you want to get rid of it? Take more on and leverage it into greater wealth.

I suppose I'm a simpleton because I don't understand how you can "leverage" your debt into greater wealth. Wouldn't paying off the debt completely so that you have 0 debt be the ultimate goal?

Please try and explain like you would to a student?

[fredr123]

Originally Posted by SeeGeeWhy

Well, when x = y it is a wash, but consider that you can liquify savings or lend against other investments whereas bad debts just get you more interest payments.

It is a very rare case that interest on a loan is less than or equal to what you would be able to earn by holding your money in a GIC, so it is usually best to pay off all of your loan debts first.

The other thing I don't get is why people accelerate their mortgage payments. If the debt is good and cheap (as Photon mentions above), then why do you want to get rid of it? Take more on and leverage it into greater wealth.

I meant X+Y%. Missed the <shift> key there.

It would be awesome if I could take my money, make the normal payments on student loans and then invest the rest in something that will bring a return greater than the interest I would be paying on my debts. Unfortunately, we're not talking about a lot of money to invest right now and it's a lot easier to find ways to incurr a debt with a high interest rate than it is to find a way to secure an investment with an even higher interest rate...

[fredr123]

Originally Posted by Mr.Coffee

I suppose I'm a simpleton because I don't understand how you can "leverage" your debt into greater wealth. Wouldn't paying off the debt completely so that you have 0 debt be the ultimate goal?

Please try and explain like you would to a student?

I think what he means is if you have, say, a mortgage with low interest rate and payments that you can handle, it doesn't make sense to try and pay off that nice debt faster. Take the extra amount that you would be putting into paying off the nice debt and put it into something else. For example, use it to get a new mortgage on some other investment property or something.

[photon]

Originally Posted by Sylvanfan

Most people don't have that vision, discipline, or risk tolerance though. If they did people like you wouldn't be able to keep making money off those folks!

I think most would if they were educated about the whole thing. I grew up in a family that never had money, managed it terribly, and started out on my own with defaulting on credit cards and messing up my credit. Eventually I learned, but if this kind of stuff was taught earlier on then I think more people would do it.

Originally Posted by Mr.Coffee

I suppose I'm a simpleton because I don't understand how you can "leverage" your debt into greater wealth. Wouldn't paying off the debt completely so that you have 0 debt be the ultimate goal?

Please try and explain like you would to a student?

We're making the assumption that the debt in question is actual cash; for example borrowing against the equity in your house or something like that, something that gives you cash in hand.

So then it simply comes down to numbers.. if you invest that cash (which you borrowed) in an investment that gains you more than the cost of borrowing it (the interest rate on the borrowing), then you come out ahead.

If you are paying 5% interest a year on $100,000, but you are making 20% interest on it, you are making $15,000 a year.

Whereas if you had worked hard to get your debt to zero, then started saving, you would have had to save $1250 a month of your own money a month to end up with that same $15,000.

In the case of the house, the faster I pay down a house the more of my own money is in that house and the less of the banks money is in that house, so as the value appreciates it's my own money working for that appreciation, when my goal is to have other people's money working for me.

[SeeGeeWhy]

Mr.Coffee - Photon explained it pretty well.

Good debt is money that you get from other people for a cheap price. It is hard to come by so you should take it while you can and never pay down the principle, because it wasn't yours in the first place. A lender like a bank is typically happy to sit and collect interest on their money, and an entrepreneur like yourself is happy to take the difference on their annual return.

The point is to try to invest in assets that will give you a sustained return, or passive income, year on year. That way, the bank will continue to get it's cut while you continue to take in the difference until you are ready to sell and pay off the balance of the loan.

Some people like to go for one time hits, which is not a bad strategy, but with things like real estate, the longer you sit on something the more value it will have when you finally do sell. It is the cashflow you create in the time inbetween that makes the difference.

It all depends on your goals, the amount of time you have to dedicate to such plans, and your risk tolerance... but good debt should never be turned down.

[Slava]

The only thing to add to the "leverage your debt" point is that if you are investing this debt into the right things then you can also write off the interest, so you really don't even need to earn as much to make it worthwhile (don't need to be as risky).

[Sylvanfan]

Originally Posted by photon

I think most would if they were educated about the whole thing. I grew up in a family that never had money, managed it terribly, and started out on my own with defaulting on credit cards and messing up my credit. Eventually I learned, but if this kind of stuff was taught earlier on then I think more people would do it.

The thing is if everybody did it, there would be no one to sucker into selling it to and hence no market. If theres no market to sell it to you can't make any money.

I do think that money tends to get that taboo label and people don't like to talk about it. Which is really too bad because being able to manage money is something that I think is important. Odd thing is my wife's parents have a fair bit of money and have managed their money pretty well from what I can tell. Mine didn't have a great deal of it and didn't manage it nearly as well as they could have. But mine would talk to me about money and at least tried to set me up with good habits. My wifes parents never bothered to teach her anything about it.

[fredr123]

No one taught me a buttload of crap about money either. Anything to do with finances, anything at all, has been a complete mystery to me. I've done my best to ask friends and respected colleagues and really tried to learn how things work. I've come a long way but am probably 2-3 years away from overtaking Donald Trump at this point...

[housejunk]

Originally Posted by Slava

There were a few scams as well. Something about "buying" the property and renting them out, but not paying the mortgage. By the time the property was foreclosed upon the guys had pocketed some pretty good money. I don't know all of the details (obviously) but this is basically what I've heard.

I'm not sure, but I think you may be referring to an old tax scam/shelter that's pretty legendary. It involves an indivdiual with a large outside source of income buying a rental unit basically on borrowed money with a ridiculous interest rate. Over time, the interest payments and other costs (like dramatic renovations) associated with the unit creates a loss which he can deduct off of his primary source of income. Later, he can sell the place at a large return, and in effect he's made back his initial investemnt over that period without having to pay any income tax on his primary source of income. Eventually he will have to pay some taxes on the capital gain, but the difference in deferred taxes and income tax results in a significant gain for the indivdiual.

The scheme was used quite often, but the government closed the loophole on it awhile back. However, it always takes them a few fiscal years to catch on to the new "scheme" that's in favor.

[SeeGeeWhy]

Originally Posted by Slava

The only thing to add to the "leverage your debt" point is that if you are investing this debt into the right things then you can also write off the interest, so you really don't even need to earn as much to make it worthwhile (don't need to be as risky).

Shhhh! Don't tell them EVERYTHING!

Just kidding. I totally forgot to mention that point, good pick up.

[SeeGeeWhy]

Originally Posted by Sylvanfan

The thing is if everybody did it, there would be no one to sucker into selling it to and hence no market. If theres no market to sell it to you can't make any money.

I am not sure what you mean by the "its" in the quote above... clarification?

I am with Photon. I think our economy would be quite interesting and healthy if a majority of people were more educated in money matters. Kiyosaki has made an empire out of fiscal education, and it is something that he is very passionate about.

[Red]

Originally Posted by SeeGeeWhy

Shhhh! Don't tell them EVERYTHING!

Just kidding. I totally forgot to mention that point, good pick up.

He didn't tell them everything. He forgot to mention that most casuals lose money on the markets, are too knee jerk to sustain any flactuation, are not disciplined enough to make it work and for most part would never come ahead.

Only a few are willing to invest borrowed (against their home) money and even fewer can actually make money on it.

[JiriHrdina]

Should we be teaching some of this money management stuff in school? I recall taking CALM (Career and Life Management) and the education amounted too:
- Credit cards are evil
- Invest a percentage of your income into mutual funds and by the time you're 45 you'll be stinkin' rich
- Now here's an egg, go run off and pretend its a kid.

Are we teaching our youth anything about real estate, mortgages, and for that matter other money management/investment strategies?

Seems to me that we are focused on one path - the RRSP one. Which is really just a part of the bigger puzzle.

Course this is all based on what I remember learnin' maybe there was more there than I recall.

[SeeGeeWhy]

Originally Posted by Red

He didn't tell them everything. He forgot to mention that most casuals lose money on the markets, are too knee jerk to sustain any flactuation, are not disciplined enough to make it work and for most part would never come ahead.

Only a few are willing to invest borrowed (against their home) money and even fewer can actually make money on it.

Have a story to share with us, Red?

I know for a fact that I don't have the stomach for real estate right now, so I stay out of it.

[fredr123]

Originally Posted by JiriHrdina

Should we be teaching some of this money management stuff in school? I recall taking CALM (Career and Life Management) and the education amounted too:
- Credit cards are evil
- Invest a percentage of your income into mutual funds and by the time you're 45 you'll be stinkin' rich
- Now here's an egg, go run off and pretend its a kid.

Are we teaching our youth anything about real estate, mortgages, and for that matter other money management/investment strategies?

Seems to me that we are focused on what path - the RRSP one. Which is really just a part of the bigger puzzle.

Course this is all based on what I remember learnin' maybe there was more there than I recall.

There was also a section on balancing your cheque book. The confused looks of many of my classmates was priceless. Debits? Credits? Like the cards?

[Sylvanfan]

Originally Posted by JiriHrdina

Should we be teaching some of this money management stuff in school? I recall taking CALM (Career and Life Management) and the education amounted too:
- Credit cards are evil
- Invest a percentage of your income into mutual funds and by the time you're 45 you'll be stinkin' rich
- Now here's an egg, go run off and pretend its a kid.

Are we teaching our youth anything about real estate, mortgages, and for that matter other money management/investment strategies?

Seems to me that we are focused on what path - the RRSP one. Which is really just a part of the bigger puzzle.

Course this is all based on what I remember learnin' maybe there was more there than I recall.

Well RRSP's are hardly bad. In fact to save for your first house they might be one of THE best options out there. You make your contribution, get a a tax credit back to yourself and the money in the RRSP grows tax free. For a first home you can borrow out of your RRSP for your down payment interest free so long as you pay it back to yourself within a specified amount of time.

So for someone like fredr123 this is probably the best way to go about making savings. With this you can get interest free growth on the money, AND should get a tax refund which your can either put into the RRSP for next year, use to pay down some debts, or do a bit of both.

[JiriHrdina]

Originally Posted by Sylvanfan

Well RRSP's are hardly bad. In fact to save for your first house they might be one of THE best options out there. You make your contribution, get a a tax credit back to yourself and the money in the RRSP grows tax free. For a first home you can borrow out of your RRSP for your down payment interest free so long as you pay it back to yourself within a specified amount of time.

So for someone like fredr123 this is probably the best way to go about making savings. With this you can get interest free growth on the money, AND should get a tax refund which your can either put into the RRSP for next year, use to pay down some debts, or do a bit of both.

Didn't mean to imply RRSP's are bad, but you've highlighted all the ins and outs that I don't recall being covered.

Maybe its because its too complex? Not sure. But I would rather them spend more time teaching youth how to get their financial **** together rather than a lot of the other material that was in there instead.

I recall spending an entire class where we had to brainstorm all the different slangs for various body parts and sexual acts. Funny stuff when you are in high school, but hardly valuable from an education standpoint.

[Ace]

Originally Posted by Sylvanfan

One thing about Mortgage brokers though is that they're not always the best choice if you have an existing mortgage and want to change houses. I made that mistake the first time I moved going back to the mortgage broker again who got me the same mortgage but I had to pay the 3 months interest payout on that mortgage to move to the next one.

The last time I moved I went directly to the institution that I had my mortgage with and was able to get the new mortgage and had the three months interest credited back to me. A friend of mine was looking to upgrade his house recently and his mortgage broker told him he'd have to pay out the penalty on his mortgage and get a new one. I told him to go talk to the loans manager at the institution and try to negotiate it so they could get out of that and he was able to do so. Now the key is to get that and still get the best mortgage product out there for you. If you're switching the type of mortgage you have than probably no dice.

A good mortgage broker will do this for you...

[Sylvanfan]

Originally Posted by SeeGeeWhy

Have a story to share with us, Red?

I know for a fact that I don't have the stomach for real estate right now, so I stay out of it.

So what are you investing your money in than to make more interest than what you're paying to borrow it?

I'm also a bit chicken on real estate these days, but the stock maket can be everybit as volatile. I'll put my long term savings there but I don't know if I'd want to put my home equity and long term savings into it. Today the prime lending rate on secured credit is anywhere from 5.5-6%. So if you write 50% of that off you still need to get 10% returns just to equalize what paying down my mortage really is. Plus you also have to pay tax on earnings. At the end of the day it comes out as being a safer more conservative route for me to go. If the real estate and stock market crash my house is still a place that I can live. If I own it than all I have to do is stand outside with weapons and fend off the savages and not worry about the bank chasing me out!

[photon]

Originally Posted by Sylvanfan

The thing is if everybody did it, there would be no one to sucker into selling it to and hence no market. If theres no market to sell it to you can't make any money.

That's making the assumption that the prices in the market are driven by suckers who are overpaying, which I don't really think is the case.

You could still make money if every single person was a savvy investor. In real estate, you don't even have to make any money beyond inflation, because of the leveraging your ROI is 4X whatever the increase is, so if you only make 3% / year on property value increase, you're still making 12% on your money. And that's not taking any tax benifits or mortgage paydown by your tenants into account.

So everyone could make good returns just by holding their properties that grow at inflation until they sell them to new young investors