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I made the same argument lower in the thread but with omission of an instant price bump the instant you get the home or buying purely with cash, the idea of get

I made the same argument lower in the thread but with omission of an instant price bump the instant you get the home or buying purely with cash, the idea of getting a very expensive home with the strategy of banking the difference in appreciation is typically a very bad idea. Banks will love to tell you its a great idea and that is because a million dollar loan held for 5 years at 5% interest will cost you 250k in interest to hold the asset effectively wiping out the 250k profit if that happens. The only true reward is going to the bankers for taking the risk of loaning a million bucks.

gfodor 14y ago
It probably wasn't clear but I thought it went without saying that the example I gave is a horrible idea in practice. As soon as you see the word "leverage" you should start getting scared. When I hear the word "mortgage" I hear "leverage" whereas most people hear "monthly payments where I own the house instead of renting it." It's bad news.
- moocow01 14y ago
  Agree - I wanted to point out the problem with the seemingly rosy situation of using leverage to "get ahead." There are many people that think they are being financially smart by buying as much a house as the bank will give them with the assumption they will bank the difference while seemingly never paying attention to where their paycheck is evaporating each month.
- jaggederest 14y ago
  Leverage isn't scary. Look at the site you're on - the entire startup culture is based on leverage. Leverage is a way to increase both the risk and reward. It only increases volatility, not absolute ratios.
  - gfodor 14y ago
    Volatility, when it comes to large numbers with dollar signs next to them, is scary. Startup culture is not leverage in the sense I am using here. Startup founders are generally leveraged on the upside but not on the down. They own calls. If you don't believe me consider that sometimes the powerball jackpot every few years has a positive expected return. Unless you are going to live forever, you need to be mindful of volatility.
    - brc 14y ago
      >Startup founders are generally leveraged on the upside but not on the down. I don't agree with this at all. This assumes zero costs on the part of the founder when it comes to a startup. There are significant costs, including extra work, low or no salary, and opportunity costs. I agree that the potential upside is much more like a call than a long position, but all calls have a premium cost, and have a much higher risk of being out the premium cost with no reward.
      - gfodor 14y ago
        Where did I say there was no cost? My point is exactly what you just said.
  - moocow01 14y ago
    Leverage by its definition is scary. As you said increased risk/reward... $X,XXX,XXX - 50% chance of 1.2x, 50% chance of 0.8x - not so scary $X,XXX,XXX - 1% chance of 50x, 99% chance of $0 - scary Its only not scary if you have an infinite amount of money and infinite number of rolls of the dice.
    - anthonyb 14y ago
      Your second bet should be greater than 100x for it to be worthwhile. Still scary, but not for the reasons that you were thinking of.
- brc 14y ago
  Leverage is the only way to larger returns. This is true whether you go from a 1 person company to a 2 person company, whether you borrow or take equity to expand a company, or whether you borrow to fund a house. Without leverage, you're getting nowhere. Employing a person is using leverage - you're betting that the employee will generate more revenue than they cost to keep. Buying a house with leverage is neither dumb nor smart. It is a strategy. Strategies only become successful or failure after the events unfold. In the case of houses, you only lose if the resale value of the property falls below the outstanding amount of the loan, presuming interest + taxes + maintenance do not exceed the equivalent amount of rent. Because loans are fixed at a currency amount on the date of funding, a property that keeps pace with inflation wins. There are also intangible aspects to ownership, including security of tenure and ability to modify the dwelling as needs arise. It's impossible to put a price on this, but you could imagine one by asking a tenant how much insurance would they pay per year to prevent being evicted. The key to property in general is the land underneath the property. A dwelling is itself a depreciating asset, which wears out, becomes unfashionable and falls in value. The land underneath the dwelling is the bit that increases in value, or at the very least maintains it's value compared to a currency being systematically inflated by a central bank. For many people, a modest mortgage and their own property is a sensible investment, provided that they do not trade houses excessively, dip into the equity or destroy the value of their house. So, again, leverage is a strategy used everwhere with many things. Excessive leverage is high risk, but sensible, well managed leverage is the key to success in life.
  - 001sky 14y ago
    a modest mortgage and their own property is a sensible investment == Mortgage is a Liability, not an Investment
    - brc 14y ago
      Property plus mortgage should still be net positive. An irrational fear of debt means investment returns will be perpetually poor.
      - 14y ago
- lsc 14y ago
  >As soon as you see the word "leverage" you should start getting scared. Meh, that's mostly how I've played it so far, and I've done... poorly compared to the people I know who have leveraged. Especially in the housing market. Especially in housing, I mean, as long as you don't have other assets, and the potential upside is large enough to make up for 7 years of poor credit, if some damnfool bank is willing to lend you a bunch of money to buy a house in a volatile market, why not leverage? If housing prices go up and you sell out before the fall, the potential for profit is huge. If prices fall, at least in California, my understanding is that most home loans are 'no recourse' - meaning that you can give the keys back to the bank and they can't come after you for the balance. Worst case, bankruptcy. So yeah, uh, I can see how people that use leverage generally do better than I do. What is really sad and irritating about my position is that yeah, I'm profitable, I own my servers free and clear, I have no outstanding debt, etc, etc, but I still have leases. And leases? as far as I can tell, are treated /exactly like/ debit if you want out early. Before the year is out, I'll likely be signing a five year datacenter contract worth as much as a nice silicon valley condo, and at the end of those five years, I'll own nothing. (and that one lease will save me rather a lot of money over the two smaller leases I currently have.) That's a lot of money. It's very rare that the value of my servers is higher than the remainder of the lease. (well, the amount I could actually get for the servers. the 'replacement value' is considerable. Retail is hard work.) I mean, I own my servers, but after five years, the thing is worth a tad more than it's value in steel (yeah, there's gold in them circuit boards, but not a whole heck of a lot of it.) For me? that's what changed my view of the rent vs. buy question. Leases, especially commercial leases are usually less flexible than buying. And every time they renew? if the landlord thinks it's hard for you to move, prices go up. It's terrible. I'd much rather have a payment I can count on for the next 15 years, and then know I'll own the place after that (modulo property taxes)
  - coopdog 14y ago
    Here in Australia I'm quite bullish about commercial property. The residential market is garbage because people buy emotionally, and the market is therefore full of irrational actors. But the commercial market is boring and therefore full of investors who logically value any potential assets and don't pay too much for them (meaning you can still find decent returns). Being a commercial land owner is great, as you've found yourself on the receiving end of. And by the same token, your business customers no doubt pay you for a service and at the end of each month have nothing tangible to keep, which is kind of the same deal. But I'll keep renting my residential house, let the owner subsidise my rent by taking a loss (negative gearing), and put my savings into commercial property where I receive enough to cover the interest on the loan and then some.

gfodor 14y ago

It probably wasn't clear but I thought it went without saying that the example I gave is a horrible idea in practice. As soon as you see the word "leverage" you should start getting scared. When I hear the word "mortgage" I hear "leverage" whereas most people hear "monthly payments where I own the house instead of renting it." It's bad news.

moocow01 14y ago
Agree - I wanted to point out the problem with the seemingly rosy situation of using leverage to "get ahead." There are many people that think they are being financially smart by buying as much a house as the bank will give them with the assumption they will bank the difference while seemingly never paying attention to where their paycheck is evaporating each month.
jaggederest 14y ago
Leverage isn't scary. Look at the site you're on - the entire startup culture is based on leverage. Leverage is a way to increase both the risk and reward. It only increases volatility, not absolute ratios.
- gfodor 14y ago
  Volatility, when it comes to large numbers with dollar signs next to them, is scary. Startup culture is not leverage in the sense I am using here. Startup founders are generally leveraged on the upside but not on the down. They own calls. If you don't believe me consider that sometimes the powerball jackpot every few years has a positive expected return. Unless you are going to live forever, you need to be mindful of volatility.
  - brc 14y ago
    >Startup founders are generally leveraged on the upside but not on the down. I don't agree with this at all. This assumes zero costs on the part of the founder when it comes to a startup. There are significant costs, including extra work, low or no salary, and opportunity costs. I agree that the potential upside is much more like a call than a long position, but all calls have a premium cost, and have a much higher risk of being out the premium cost with no reward.
    - gfodor 14y ago
      Where did I say there was no cost? My point is exactly what you just said.
- moocow01 14y ago
  Leverage by its definition is scary. As you said increased risk/reward... $X,XXX,XXX - 50% chance of 1.2x, 50% chance of 0.8x - not so scary $X,XXX,XXX - 1% chance of 50x, 99% chance of $0 - scary Its only not scary if you have an infinite amount of money and infinite number of rolls of the dice.
  - anthonyb 14y ago
    Your second bet should be greater than 100x for it to be worthwhile. Still scary, but not for the reasons that you were thinking of.
brc 14y ago
Leverage is the only way to larger returns. This is true whether you go from a 1 person company to a 2 person company, whether you borrow or take equity to expand a company, or whether you borrow to fund a house. Without leverage, you're getting nowhere. Employing a person is using leverage - you're betting that the employee will generate more revenue than they cost to keep. Buying a house with leverage is neither dumb nor smart. It is a strategy. Strategies only become successful or failure after the events unfold. In the case of houses, you only lose if the resale value of the property falls below the outstanding amount of the loan, presuming interest + taxes + maintenance do not exceed the equivalent amount of rent. Because loans are fixed at a currency amount on the date of funding, a property that keeps pace with inflation wins. There are also intangible aspects to ownership, including security of tenure and ability to modify the dwelling as needs arise. It's impossible to put a price on this, but you could imagine one by asking a tenant how much insurance would they pay per year to prevent being evicted. The key to property in general is the land underneath the property. A dwelling is itself a depreciating asset, which wears out, becomes unfashionable and falls in value. The land underneath the dwelling is the bit that increases in value, or at the very least maintains it's value compared to a currency being systematically inflated by a central bank. For many people, a modest mortgage and their own property is a sensible investment, provided that they do not trade houses excessively, dip into the equity or destroy the value of their house. So, again, leverage is a strategy used everwhere with many things. Excessive leverage is high risk, but sensible, well managed leverage is the key to success in life.
- 001sky 14y ago
  a modest mortgage and their own property is a sensible investment == Mortgage is a Liability, not an Investment
  - brc 14y ago
    Property plus mortgage should still be net positive. An irrational fear of debt means investment returns will be perpetually poor.
    - 14y ago
lsc 14y ago
>As soon as you see the word "leverage" you should start getting scared. Meh, that's mostly how I've played it so far, and I've done... poorly compared to the people I know who have leveraged. Especially in the housing market. Especially in housing, I mean, as long as you don't have other assets, and the potential upside is large enough to make up for 7 years of poor credit, if some damnfool bank is willing to lend you a bunch of money to buy a house in a volatile market, why not leverage? If housing prices go up and you sell out before the fall, the potential for profit is huge. If prices fall, at least in California, my understanding is that most home loans are 'no recourse' - meaning that you can give the keys back to the bank and they can't come after you for the balance. Worst case, bankruptcy. So yeah, uh, I can see how people that use leverage generally do better than I do. What is really sad and irritating about my position is that yeah, I'm profitable, I own my servers free and clear, I have no outstanding debt, etc, etc, but I still have leases. And leases? as far as I can tell, are treated /exactly like/ debit if you want out early. Before the year is out, I'll likely be signing a five year datacenter contract worth as much as a nice silicon valley condo, and at the end of those five years, I'll own nothing. (and that one lease will save me rather a lot of money over the two smaller leases I currently have.) That's a lot of money. It's very rare that the value of my servers is higher than the remainder of the lease. (well, the amount I could actually get for the servers. the 'replacement value' is considerable. Retail is hard work.) I mean, I own my servers, but after five years, the thing is worth a tad more than it's value in steel (yeah, there's gold in them circuit boards, but not a whole heck of a lot of it.) For me? that's what changed my view of the rent vs. buy question. Leases, especially commercial leases are usually less flexible than buying. And every time they renew? if the landlord thinks it's hard for you to move, prices go up. It's terrible. I'd much rather have a payment I can count on for the next 15 years, and then know I'll own the place after that (modulo property taxes)
- coopdog 14y ago
  Here in Australia I'm quite bullish about commercial property. The residential market is garbage because people buy emotionally, and the market is therefore full of irrational actors. But the commercial market is boring and therefore full of investors who logically value any potential assets and don't pay too much for them (meaning you can still find decent returns). Being a commercial land owner is great, as you've found yourself on the receiving end of. And by the same token, your business customers no doubt pay you for a service and at the end of each month have nothing tangible to keep, which is kind of the same deal. But I'll keep renting my residential house, let the owner subsidise my rent by taking a loss (negative gearing), and put my savings into commercial property where I receive enough to cover the interest on the loan and then some.