If I have an interest only loan on something like a taxi medallions (thanks Planet Money for the example!), I generate cash flow with that asset, and can walk away from the debt at any time through bankruptcy of the owning entity, that’s still positive wealth (cash flow).
The less capital you need to obtain access to greater amounts of cash flow, the better the cash on cash return/investment quality.
Furthermore, if you pay for something very long, you are also going to be paying a lot of interest. You wouldn’t be paying that long if you could afford it and you would be getting a better credit rate if you could afford it.
Unfortunately not everybody is able to invest smartly and thus good debt easily becomes bad debt. It doesn’t help that most people potray reale estates as good debt because they really aren’t that good unless you know what you are doing.
You and I must have very different ideas of what the word "extremely" means.
> walking away from the property is always an option
That is only true in twelve states. In the other 38, the lender can sue you to recover the difference between the house's value and what you owe even after they foreclose.
I only use non-recourse mortgages when investing in real estate. YMMV.
Real estate is only one investment vehicle where you don't need a large amount of capital to realize substantial cash flows. Whenever possible, seek out leverage opportunities.
I've known several people who wanted to "get into real estate" so they bought duplexes and became landlords. All of them lost money or broke even because they went into it without doing their due diligence. My parents ended up just walking away from their "investment" property and declaring bankruptcy, that's how much they lost out. It isn't buy property -> profit like people think.
Leverage cuts both ways - it magnifies both gains and losses.
[1] I personally know at least three people who sold houses for less than the bought them 7-10 years later. My parents have owned their house for 25 years and while the dollar value went up it hasn't kept pace with inflation (recently got three appraisals) even though they have cared for it and even added an extra bathroom.
If you're investing in real estate by purchasing a cash-flowing property like apartments, then you'd be crazy not to use leverage. You can easily calculate your ROI based on property cashflow and projected value based on rent growth. And your ROI is always going to be bigger if you only put up 25% of the value and let the bank pay for the rest as long as you're cashflowing more than the mortgage payments.
Your health is also of massive value, and indeed is something you can sell -- a healthy kidney alone is worth $250k.
If you remember your accounting courses: assets are equal to the sum of all liabilities and equity. Meaning mortgage debt and home equity combine to form your total home assets. A person may have $1m in assets and $900k in liabilities. Or a person could have $200k in assets but $50k in liabilities. Which person is more "wealthy".
I suppose its a matter of opinion because, after all, we haven't defined a goal. Is a low debt to equity ratio desirable? Depends on what you're trying to accomplish. Is high cash flow desirable? As an end state, yes that's desirable but what if that end state requires a large amount of debt to achieve?
Yeah, but the house itself is most likely worth at least the same as the loan.
The standard simple calculation for net worth is assets minus debts, so credit card debt, mortgages, etc. would be negative.
But even though the mortgage is negative, the value of the home would be positive, and the net difference between the value of the home and the debt owed on the mortgage could very well be a positive component of net worth.
Is that really a thing? Do many people really go beyond the standard 30 year term of their mortgages?