4 ms·

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 exp

by 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.
  - 001sky 14y ago
    Asset X + liability X = net Zero Equity change Accounting 101 Returns only increase if there is positive drift to the underlying asset walk. In other words, this only makes sense if prices are OK. If prices are fundamentally "off" (ie, housing bubble, stock market bubble), your going have your "correction" magnified. Just worth being accurate in thinking.
    - brc 14y ago
      You shouldn't have a change in liability after taking out a mortgage, unless you refinance to release equity, which is a whole other discussion. The missing point in many peoples analysis is that inflation is constantly eroding buying power and savings, and that property with a large land component (house > apartments) is a good hedge against inflation, due to naturally restricted supply. Of course, governments these days tend to magnify the supply restriction by refusing to approve new land developments in many areas. Even if you buy at the top of a bubble, if you hang on, you're still likely to come out ahead over a 10-20 timeframe, as inflation takes care of your overpriced purchase. Of course all property is local, and it's very easy to permanently lose a lot of money by purcashing the wrong property for the wrong price.
      - 001sky 14y ago
        You shouldn't have a change in liability after taking out a mortgage == To be clear, mortgage is a debt. debt is a liability. So, if you borrow to buy a house: Before: Asset: $10 Liab: $0 Net: +$10 After: Asset: 100 (purch, 10% down) Liability: 90 (mortgage) Net: +$10 So there is no change in asset value. Leverage however increases the variance of the random walk of prices. You hope/pray the RW has a + drift that exceeds your cost of debt (ie, value grows X% > Y% on your pmt). If you are forced to sell (say, divorce or to relocate) you are going to bear more of the brunt of interim Vol. Over the long run (if you run out 30 years) your just facing the pricing/cost of capital issue. TLDR Mortages are from a time long gone, where people lived in houses their whole working lives, from 22-52, with the same job, a wife and kids, etc. Then it made much more sense then today, when you need 1-200k to down-pay a 1-2m house (age 32 to 62?) and move/change jobs every X years, divorce is 50% liklihood, etc.
- roel_v 14y ago
  A house financed with a mortgage (which is what he said, imo) can be an investment. A mortgage by itself is not an investment, it's what you use the mortgage for that makes the mortgage part of the investment strategy. Really, all the 'mortgage = bad!' speak in this thread is depressing. How do you people ever think of making real money? Leverage is a wealth multiplier. Of course it comes with risk, but so does crossing the street - you need to manage it well (looking left and right before crossing, and checking the economic fundamentals of your leveraged investments).
  - prawks 14y ago
    Could you recommend any resources for educating yourself on how to '[look] left and right before crossing, and checking the economic fundamentals of your leveraged investments'? I'm not a home owner, but eventually I may be, and this topic sounds fascinating to me.
  - nullc 14y ago
    Leverage is a _return_ multiplier, including a _negative return_ multiplier. Another way of putting it is that leverage is a risk multipler. As an investment single family homes are not particularly attractive, a mortgage may or may not make sense depending on the terms, risk tolerance, and the expected market behavior... but it's really only the inherent shelter-short you suffer that makes a mortgage interesting in most cases. (Because that short is what makes not owning a home also risky)
  - sanderjd 14y ago
    Most people should not be thinking of making "real money" when they purchase a home, they should be thinking of having a place to live. It takes a certain degree of financial security to start thinking about using leverage to multiply wealth, which many people buying mortgages don't have. Tying the risk of a leveraged investment to something as important as the place you live is dangerous for the large portion of the population that is not particularly financially savvy.
josephlord 14y ago
Much of your comment is valid but this paragraph is just so wrong I needed to pull you up on it. > 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. While absolute dollar loses may not be bigger if you are leveraged than buying the same house outright the buying power is and the absolute loss is greater than it would be if you bought something that you could buy outright. Example 1: If you have 100K and buy an apartment for 100k then the market drops 10% you have 90K in equity and could still buy a similar apartment (and trading up is actually cheaper than before). Example 2: You have 100K and borrow 400K to buy a 500K house. The market falls 10% and you have a 450K house with a 400K mortgage and only 50K equity and you are unlikely to be able to get a similar property. You may need to trade down substantially and you can't even buy a 90K apartment without a mortgage. The final sentence is true but makes it sound like there is a high confidence of keeping up with inflation (doubtful in my view given the current levels of private debt. > Because loans are fixed at a currency amount on the date of funding, a property that keeps pace with inflation wins.
- jtc331 14y ago
  Given the fact that you are losing value on savings due to the central bank increasing the supply of money, you also have to take into the account the amount of time it took you to save up the 100K. You may very well actually saved 100K to buy the apartment, but the real value of that 100K may have already decreased by 10K. The question is whether the rate of value loss by currency inflation is outpaced by the interest you'd pay on a mortgage.
  - josephlord 14y ago
    In both my examples 100K was saved at the beginning so I'm not sure that is relevant. Currency inflation is a positive factor for you if you have a large mortgage. Deflation while obviously historically less frequent but not unknown (US 1930s, Japan 1990-current) is a negative risk if you have debt, and one that you don't have if you haven't got debt.
  - roc 14y ago

by brc 14y ago

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.
- 001sky 14y ago
  Asset X + liability X = net Zero Equity change Accounting 101 Returns only increase if there is positive drift to the underlying asset walk. In other words, this only makes sense if prices are OK. If prices are fundamentally "off" (ie, housing bubble, stock market bubble), your going have your "correction" magnified. Just worth being accurate in thinking.
  - brc 14y ago
    You shouldn't have a change in liability after taking out a mortgage, unless you refinance to release equity, which is a whole other discussion. The missing point in many peoples analysis is that inflation is constantly eroding buying power and savings, and that property with a large land component (house > apartments) is a good hedge against inflation, due to naturally restricted supply. Of course, governments these days tend to magnify the supply restriction by refusing to approve new land developments in many areas. Even if you buy at the top of a bubble, if you hang on, you're still likely to come out ahead over a 10-20 timeframe, as inflation takes care of your overpriced purchase. Of course all property is local, and it's very easy to permanently lose a lot of money by purcashing the wrong property for the wrong price.
    - 001sky 14y ago
      You shouldn't have a change in liability after taking out a mortgage == To be clear, mortgage is a debt. debt is a liability. So, if you borrow to buy a house: Before: Asset: $10 Liab: $0 Net: +$10 After: Asset: 100 (purch, 10% down) Liability: 90 (mortgage) Net: +$10 So there is no change in asset value. Leverage however increases the variance of the random walk of prices. You hope/pray the RW has a + drift that exceeds your cost of debt (ie, value grows X% > Y% on your pmt). If you are forced to sell (say, divorce or to relocate) you are going to bear more of the brunt of interim Vol. Over the long run (if you run out 30 years) your just facing the pricing/cost of capital issue. TLDR Mortages are from a time long gone, where people lived in houses their whole working lives, from 22-52, with the same job, a wife and kids, etc. Then it made much more sense then today, when you need 1-200k to down-pay a 1-2m house (age 32 to 62?) and move/change jobs every X years, divorce is 50% liklihood, etc.
roel_v 14y ago
A house financed with a mortgage (which is what he said, imo) can be an investment. A mortgage by itself is not an investment, it's what you use the mortgage for that makes the mortgage part of the investment strategy. Really, all the 'mortgage = bad!' speak in this thread is depressing. How do you people ever think of making real money? Leverage is a wealth multiplier. Of course it comes with risk, but so does crossing the street - you need to manage it well (looking left and right before crossing, and checking the economic fundamentals of your leveraged investments).
- prawks 14y ago
  Could you recommend any resources for educating yourself on how to '[look] left and right before crossing, and checking the economic fundamentals of your leveraged investments'? I'm not a home owner, but eventually I may be, and this topic sounds fascinating to me.
- nullc 14y ago
  Leverage is a _return_ multiplier, including a _negative return_ multiplier. Another way of putting it is that leverage is a risk multipler. As an investment single family homes are not particularly attractive, a mortgage may or may not make sense depending on the terms, risk tolerance, and the expected market behavior... but it's really only the inherent shelter-short you suffer that makes a mortgage interesting in most cases. (Because that short is what makes not owning a home also risky)
- sanderjd 14y ago
  Most people should not be thinking of making "real money" when they purchase a home, they should be thinking of having a place to live. It takes a certain degree of financial security to start thinking about using leverage to multiply wealth, which many people buying mortgages don't have. Tying the risk of a leveraged investment to something as important as the place you live is dangerous for the large portion of the population that is not particularly financially savvy.

josephlord 14y ago

Much of your comment is valid but this paragraph is just so wrong I needed to pull you up on it. > 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. While absolute dollar loses may not be bigger if you are leveraged than buying the same house outright the buying power is and the absolute loss is greater than it would be if you bought something that you could buy outright. Example 1: If you have 100K and buy an apartment for 100k then the market drops 10% you have 90K in equity and could still buy a similar apartment (and trading up is actually cheaper than before). Example 2: You have 100K and borrow 400K to buy a 500K house. The market falls 10% and you have a 450K house with a 400K mortgage and only 50K equity and you are unlikely to be able to get a similar property. You may need to trade down substantially and you can't even buy a 90K apartment without a mortgage. The final sentence is true but makes it sound like there is a high confidence of keeping up with inflation (doubtful in my view given the current levels of private debt. > Because loans are fixed at a currency amount on the date of funding, a property that keeps pace with inflation wins.

jtc331 14y ago
Given the fact that you are losing value on savings due to the central bank increasing the supply of money, you also have to take into the account the amount of time it took you to save up the 100K. You may very well actually saved 100K to buy the apartment, but the real value of that 100K may have already decreased by 10K. The question is whether the rate of value loss by currency inflation is outpaced by the interest you'd pay on a mortgage.
- josephlord 14y ago
  In both my examples 100K was saved at the beginning so I'm not sure that is relevant. Currency inflation is a positive factor for you if you have a large mortgage. Deflation while obviously historically less frequent but not unknown (US 1930s, Japan 1990-current) is a negative risk if you have debt, and one that you don't have if you haven't got debt.
- roc 14y ago