with your premise of taking on as much debt as you possibly can. It’s been awhile since I read both of Kiyosaki’s books that are frequently talked about on this board. However, one thing I remember:
An ASSET is something you own that puts money in your pocket.
A LIABILITY is something that owns YOU and takes money out of your pocket.
On the face of it, it would appear that you are highly leveraged. If the RE market in your area “burps,” as it frequently does, or if businesses start laying off people because the economy “hiccups,” as it surely will, then your leveraging will crash in on you.
I mean no disrespect here for you…I’m just trying to point out that the leveraging you appear to be using was emphasized by some highly educated real estate gurus back in the “go-go” 80’s.
As I was having my taxes prepared my tax guy asks why I’m paying extra money to my mortgage (300 a month). I told him that I just wanted to get it paid off quicker. He then gave me the “you should invest it” line. I’ve debated this with many people and am still not sure who is right. Does anyone here have any thoughts? Maybe it just comes down to how much is the peace of mind worth if your house is paid off. Thanks to anyone who responds.
I am a wealth builder. I not only have a large mortgage on my principal residence, but I have a large 2nd in place as well. This makes many people nervous.
For me, it calms my nerves.
Number 1 - I invested the second mortgage in a very profitable multi-unit complex and even though I pay 11% interest on that money - it has paid itself back many times over in the increased equity I have in a large townhouse complex.
I also put second mortgages on some of my rental units. This again has allowed me to accelerate my buying and has allowed me to really build a large portfolio in a short period of time.
Now, as I get older (relatively speaking of course) I will not be as aggressive and I will actually look to paying down my mortgage debt. I plan to acquire a large number of units this year and I plan to take on as much debt as I possibly can. Am I worried ? Not at all. I increase my rents on all my units as soon as I take possession and through aggressive landlording I can really look after additional debt payments. Meanwhile, my property increases in value daily due to better rental income
as well as increased market value. (But I buy right and that locks in my profit on day one).
I know there are those on this board who disagree with my position. And thats fine. But, I don’t see how you can go from zero to million dollar net worth in a relatively short time period (i.e. 2-5 years) without an aggressive buying program that demands taking on a lot of mortgage debt.
Although I agree, there are a lot of factors to consider, don’t always just believe the numbers. These numbers are assuming that your life will continue the same way forever. (Congress and the Prez are assuming this with the so-called budget surplus.) I know several people who paid off their 30 year mortgage in 10 or 15 years and now only need to work part-time to support their family.
One example is my mother-in-law. 53 years of age. She has a condo that requires a $170 a month mortgage payment. By adding an extra $100 to every payment I believe we calculated she could pay the whole thing off in 7 years.
and the only way to truly answer this is to “run the numbers” as Ed Garcia would say. Here’s my take:
Any mortgage payment you make is partially deductible on your income taxes. However, how much is that actually worth? If you are in the 28% federal tax bracket (I’m eliminating any state obligations in my example) then for every dollar in INTEREST you pay, “Uncle” only gives you 28 cents as an income tax “refund.” Your 1$ INTEREST PAID OUT has shrunk to 28 cents of VALUE.
Suppose, however, that you had no mortgage payment. Instead, you decided to put that money to work for you in a CD. (I know…I KNOW…there are more profitable places then that. Just follow the logic.) If you are still in the same bracket, then for every dollar you RECEIVED AS INTEREST, you would pay 28 cents in tax. Your $1 of INTEREST RECEIVED has shrunk to 72 cents of VALUE.
Which would you rather have? A credit of 28 cents PAID OUT or 72 cents KEPT IN YOUR POCKET?
Re: Should you put extra money to your mortgage or invest it? - Posted by Mark (SDCA)
Posted by Mark (SDCA) on March 30, 2000 at 10:31:08:
Well… from a pure numbers game, it PROBABLY does not make sense. Paying off the mortgage is an illiquid investment at your mortgage rate times 1- your tax rate. So for example, if your mortgate is at 8% and you combined federal and state tax rates are 30% then it would be 8% x (1-.3) = 8% x .7 = 5.6%. NOT a good deal for an illiquid investment. Obviously, as the mortgage rate gets lower and/or the tax rate gets higher, it looks even worse.
it comes down to whether you can get a better yield on that money. How much interest are you paying on your mortgage? It’s likely that you can get a much higher return with ‘paper’ either by buying a discounted note or by doing a Lonnie deal.
Read John Behle’s articles at www.papergame.com and order his books, he’ll show you how you can use note investment to lower your mortgage payments or pay off your mortgage much faster, or better yet, make money!
I think you hit the nail on the head. If it makes you feel so much better making progress on your mortgage quickly, then maybe you should. But if it’s costing you the capital you need to do some of the investments you’ll read about here, it’s a big mistake!
For example, if you used this money to do Lonnie deals, it wouldn’t be long before the cash flow could pay for your entire monthly mortgage bill!
I guess it all comes down to how much you could earn with your extra $300/mo.