0.00% Debt, Anyone? (Page 4)

Don't confuse "lifestyle" with "wealth". Read "The Millionaire Next Door" by Tom Stanley if you want an indicator of how the majority of America's wealthy live. In terms of net worth, the person who is debt-free and investing [through whatever vehicle he/she feels comfortable with, be it real estate, funds, stocks, what have you] has a net worth at least 10 times greater than the person earning more money with payments coming out of their nose trying to trick the system by investing borrowed money. It almost never works out and it's a great way to get your head taken off.

Let's say I borrow $100,000 to invest in some real estate. We'll rent it at $1,000 a month [maybe it's a duplex going for 500/unit] so we're making $12,000 per year. After V&C losses of 10% we're at 10,800/yr. Then depending on property taxes, insurance and utilities provided we could be down to anywhere from $5,200 to $8,000. We'll assume property taxes are low and insurance is cheap [it's usually higher for investment properties than residential] and we're only paying for trash collection. That means we're making $8,000 annually on our property. Since loans for investment properties have higher rates we'll even say we got a smokin' deal at 6% interest which many people don't even have on their primary residence. On our $100,000 investment we're paying $6,000 per year in interest which would create an income after debt service of $2,000. That would be a return on investment of 2%. Doesn't sound like a good deal to me, especially when the neighbor paid cash for his and is making $8,000/year [8%] on his investment AND when inflation is historically 3-4%. Payments don't make you money. Why do you think bank buildings are so big?

I'm in my 40's, am debt free and self employed. I find that having no mortgage gives me the freedom to work when I want to, not when I have to. I may never be a gazillionaire but I sure like not having to pony up any payments.

I don't consider our mortgage "debt."

Other than the mortgage (which is much less than the value of our home, and much, much less than the value of our investments/retirement savings) we are debt free. We own the cabin, the vehicles, etc...

As for being crazy for aspiring to be debt free, all I know is that working to that end while we were in our 20's means that my wife can quit working when she has our first child this summer, despite the fact that she is making significantly more than me.

The freedom to be able to make that kind of decision is priceless.

Edited by goalie 2008-02-23 6:23 PM

Absolutely one of the best books ever written.


Rule #1 in real estate investment is that you get property at least 20% under market or you don't buy it. Rule #2 is that you buy property that can be easily improved adding significant value.

An example of #2 is a property I bought when I was 20 and in college. Here's how it worked. I got an old house under contract on a corner for $30k. The house had a very large deep lot, the contract was contingent upon getting the house next door under contract which I did for $35k. It had the same shaped lot. These houses were in a college town and I knew the town wanted more student housing. So I rezoned the land into two old houses on small lots in front with four new duplex lots in the back entering from a side street. No dirt work was required. I sold the duplex lots for $15k each to builders bringing in $55k or so after costs. I used that money to pay off the house loans except for $10k which was owner financing. (Yes, I got two houses for about $10k that were worth about $75k.) After a year or so, the owner who financed the deal died at which point I'd paid the balance down to about $8k. I offered her heir $5k cash to pay off the loan and he took it (A $3k phone call). I rented those free/clear houses for a few years for about $400-$500/month each which was mostly cash flow and quickly paid me back all I'd invested and more. Then I sold both houses for a total of $89k gross.

These types of small low-risk opportunities are not that hard to find if you look and are very selective.

Edited by breckview 2008-02-23 6:30 PM

Sounds like you came out pretty well on that deal! Nice work. I highlighted some things that I think are important to consider when using the term "low-risk". First, your offer on the first house was contingent on getting a contract on house 2. If that doesn't happen, the deal is over, and the story ends. Thankfully you got a bite on your offer and we get to continue. Hiccup #2 comes with the re-zoning. Unless you were with the city planning/zoning department then I doubt YOU re-zoned the property, but at this point that is simple semantics. You applied for a re-zone and it was approved. If that doesn't go through, the deal is over and you've got $75K wrapped up in two properties making $500/mo. each. Follow my model from above and it looks like you end up with a cap rate of about 4.6%. Pay income tax on that [assuming 25% bracket] and you're down to 3.5%. Now we're fighting to keep up with inflation. Heck, my savings account with E*Trade is at 4.1% right now and it's FDIC-insured. No guarantee like that with tenants and let's not even consider going a few months with vacancies. All of a sudden "low-risk" becomes a non-sequitor in this scenario. Being a landlord is a lot of work to make $3,500 a year. Carry that out 3 years [$10,500] and factor in the appreciation of the properties [$14,000] and it ends up costing you $25,500 to earn $24,500. Oh- and I didn't factor in maintenance which is definitely part of the expenses with rental property. I did assume 10% vacancy/collection loss which is probably low for a college town, especially during the summer.

Again, everything did work out and you did come out ahead. Kudos! I'm hoping to stumble upon something like that in the future, except I'd be doing it cash-only. I know I'm not going to convince you of my opinion and I'm sure you expect the same from me, but it is definitely an interesting discussion.

Well thought out reply as a whole. The house next door was a rental and pretty much anytime you're willing buy a mature rental at retail price with no fix-up expenses, they'll bite. So I was pretty confident on this one.


The original plan was to do the rezone before the actual close but I couldn't make that happen so you're right. What I did do was talk about the project with all the people who'd vote on it so I was very confident it would pass which it did easily. There was risk in this step. But IMO it was very low. Rezone/replat risk is high when you're at odds with the general wishes of the local government, surrounding neighbors, and/or the master plan if there is one. I've been there too.


In your models you're neglecting the tax issues which changes the numbers substantially for people who earn income. Don't get me wrong, I'd never, ever recommend anybody buy a piece of real estate at market prices purely to rent it out and hope it appreciates naturally. That's the same strategy people use with liquid markets, throw money in funds and hope, which also is rarely successful.


The best thing about the experience was I learned things which I've used over and over now for two decades. Without borrowing money or waiting until I could do it with cash, I may never have, or may just now be starting the learning process instead of way back then as a dumb kid.

I also do most things cash-only now and I'm mostly just a passive partner but that's completely due to the borrowing I did early on. Although honestly, I've done a whole lot a nothin' in the last few years.

The interesting thing (to me) is that when people are young and broke, IMO, they should swing for the fence because they have little to lose. With our bankruptcy laws there's very little difference between a net worth of zero and minus one million...

Edited by breckview 2008-02-24 11:06 AM

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Try consolidating all your debt to 0% credit card (except for your mortgage). That way you are only making one payment a month and everything that you pay on it is prinicipal. When your 0% time period is up...look for another 0%. Sounds like a lot to keep up with but it's worth it in the end.

I once read the way to get out of debt is of course pay off your highest interest debts first but also you pay off your smallest debts. For example if you have a car loan of $2000 and a credit card of $6000 and you are paying $200/month on the car and $300 on the credit card then once the car is paid off apply that $200 to the $300 and you will pay off the credit card faster. Plus, when you get your small debts paid off you actually feel like you are accomplishing something!!