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Comment by toomuchtodo | Hacker News Reader

Debt is “bad” when used for depreciating assets (cars, credit cards). Debt is “good” when used as leverage on appreciating assets (real estate) or working assets (tools, business vehicles, servers, or anything else being used to generate cash flow).

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.

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But real estate debt is only good if you can afford it and you buy smart. I know a lot of people who bought a house and sold it later for less even after all the payments because they bought it high and sold it low.

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.

Even if your house ends up being less than you bought it for you still have a house. Assuming you want to live in the same area long term it seems wiser to finish a mortgage and be left with a house that's worth less than you paid for it versus paying rent for the same amount of time and ending up with nothing.

I think you're ignoring the significant carrying costs of a house. My house last year had over $11,000 in carrying costs in just taxes, insurance,and interest. Never minding the upkeep and repairs (which are significant yet difficult to estimate). There's other hidden costs like opportunity cost, the return on investment you'd be getting if you didn't have that money tied up in your house.

Houses have almost always kept ahead of inflation, and carrying expenses replace rent.

Read the post I'm replying to, we're talking about a house that went DOWN in value.

I did. It’s extremely rare for real estate to decline in value, and walking away from the property is always an option if it has (or a short sale, which is must less detrimental on your credit).

Even if it were true (and it's not[1]), the topic at hand is a hypothetical case where "your house ends up being less than you bought it" and that's what I was directly replying to. If you lose money on the sale price is (almost certainly) not even close to the amount of money you have to spend just to own the house.

[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.

> It’s extremely rare for real estate to decline in value

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.

As I mention above, you need to do your due diligence. Investing without knowing the rules is fraught with peril.

I only use non-recourse mortgages when investing in real estate. YMMV.

The mere fact that you are looking at real estate as an investment rather than as a place to live indicates that you have far more financial resources than a typical person. For a typical person it is not a realistic option to discard their entire social network and move halfway across the country just to get some more favorable mortgage laws.

You don't have to live somewhere with non-recourse mortgages. To get started, you only need 3% down, an FHA mortgage, and a 4-plex that cashflows slightly. You then eventually refi that with something more conventional and move on to your next property.

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.

You don't get to choose where you are born or grow up. You are effectively suggesting that people move a thousand miles away from every single person that they know just to get more favorable mortgage laws. That is not doable without starting from a position of privilege.

As investment, you don't actually have to live where you are buying. I have a relative 2000 miles away that buys condos in my city as investments. My wife researches them, reports back and they make a buying decision. There's a favorable situation here and they're taking advantage of it. Not by 'privilege'; by smart investing.

If you can afford to buy a house that you aren't even living in, you have far more financial resources than the vast majority of people. You seem to be completely deluded about how much a normal person can afford to put into investments.

The average person probably shouldn't be buying investment properties anyways. Running income producing properties is more of a part time job than anything else. It takes significant effort to find the right property at the right price with the right renovations in order to make a good profit. Unless you're really willing to put in the leg work (and usually the "sweat equity"), you're better off putting your money in index funds or REITs. It takes the right person to make money in real estate.

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.

It depends. On parameters like interest rates and rates of return on other asset classes and rental prices and inflation. There is opportunity cost - in some circumstances paying cheap rent and investing the difference into other investment asset classes might leave you better off in the long run. See the New York Times rent vs buy thing.

I think a lot of people incorrectly view personal residences as investments. They don't produce income and their valuation is tied largely to comps which really translates to other peoples' feelings and purchasing power at that time. Mortgaging a home is arguably a poor use of debt unless you're actually able to put a similar sum to work making a higher return elsewhere.

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.

Personally don't view this as a necessarily bad thing. Short term losses like this suck but what you learn long term is entirely more valuable than if you did well the first time. Nothing teaches you as well as losing money.

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