# Debt Comfort Levels



## tygrus (Mar 13, 2012)

I find it odd that people categorize debt in different ways. 

People have no problem taking out a loan to buy a depreciating car or a get mortgage or load up the credit card. Even most businesses have some sort of debt either rotating or long term. If you told people you had any of these types of debt they wouldn't bat an eye.

Then why is margin debt a dirty word? If you told people you borrowed money against your stock to buy more stock they would think you lost your marbles. All debt has risk, why does this seem to have more in people's minds?


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## Eclectic12 (Oct 20, 2010)

A more traditional loan like a HELOC or loan has only limited variables to worry about.

Margin is more complicated as something as simple as the brokerage deciding to change the requirements or dropping certain stocks from eligibility can change the situation dramatically.


Most people are far more familiar with the risks of cash flow versus interest rate being charged.


Being stupid with either one is a problem ... but I haven't heard of many who haven't noticed their interest rate going up and not dealt with it versus those who didn't fully understand margin who turned $160K into $36K, with the third margin call pending.


Cheers

*PS*

Just my two cents ... I'll be interested to read what others have noticed or think.


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## Just a Guy (Mar 27, 2012)

Technically a mortgage or heloc is a margin account...but the assets tend to be a lot less volatile (though that may change in the next few years in Canada as the Americans found out in 2008).

It's just the way we've been raised...investing is dangerous, being rich is bad...fear mongering by those who are unwilling to live outside the "norm".

In reality it's just a tool, used properly it can do you a lot of good, used wrong, it can cause you immeasurable pain.

I'd rather have a mortgage on a rental property than a car loan, or credit card debt to have a big screen tv. 

I know the difference between good debt and bad debt as well as the difference between investing and gambling.


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## Rusty O'Toole (Feb 1, 2012)

Sounds backwards to me. I started out investing in real estate. Going in debt to buy a rental property that would cost a $5000 monthly payment but bring in $10,000 per month while increasing in value never bothered me in the slightest.

On the other hand, I hate to borrow money for depreciating assets like a car.

I used to wonder why bankers couldn't see this. Now I think the higher ups know this perfectly well, even if the ribbon clerks (loan officers) don't.


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> Technically a mortgage or heloc is a margin account...but the assets tend to be a lot less volatile (though that may change in the next few years in Canada as the Americans found out in 2008).


The HELOC I can follow as it's ceiling is based on a percentage of the asset (somewhat similar to margin).

I'm not as sure of the mortgage ... if the house value drops to almost nothing but it's clear there's still cash flow to cover the mortgage, I'm not sure why the bank would do anything about it.




Just a Guy said:


> It's just the way we've been raised...investing is dangerous, being rich is bad...fear mongering by those who are unwilling to live outside the "norm".


Being rich is bad?
Investing is dangerous or living outside the "norm"?

Evidently you were raised in a different environment.




Just a Guy said:


> In reality it's just a tool, used properly it can do you a lot of good, used wrong, it can cause you immeasurable pain...


Yes ... the trouble is that most I've run into who have talked about margin quickly demonstrate by their conversation that they are blinded by the upside and have no idea of the risk or the potential downside. 


Cheers


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## My Own Advisor (Sep 24, 2012)

Well, I do have an issue about a car loan, over 0%. I don't do it.

I also don't load up the credit card. 

I don't see margin as a dirty word, I just prefer not to borrow for investing purposes until my mortgage is gone or very close to it.


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## Just a Guy (Mar 27, 2012)

I've seen it where a mortgage is underwater and, even though the cash flow is there, the banks want a pay down to bring the ratios more in line...heck, I've even seen cash flowing loans called in because of a policy change.

It doesn't happen often with mortgages, but take a look at the USA in 2008...banks call in the good loans to try and cover the losses of the bad ones.

As for being raised in a different environment...are you not listening to the news or radio? Do you not hear the "tax the greedy rich folk" messages everywhere? Canada is one of the most socialist countries in the world.


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## gibor365 (Apr 1, 2011)

tygrus said:


> I find it odd that people categorize debt in different ways.


I don't  For me all debt is a bad think. Never in my life had any balance on my credit card (afre req'd pay date), all carss and other good we own we bought in cash. Cannot buy in cash, don't buy or go for cheaper option... , first thing I did when took mortgage is to pay it out and we did in 6 years.


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## Just a Guy (Mar 27, 2012)

You obviously never owned rental properties...borrow the money to pay for the place, tenants pay for it, in 20 years you've got a paid asset that cost you nothing...there was some work involved to be sure, but it creates money from nothing.


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## Letran (Apr 7, 2014)

I love DEBT, I think of it as OPM


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## gibor365 (Apr 1, 2011)

Just a Guy said:


> You obviously never owned rental properties...borrow the money to pay for the place, tenants pay for it, in 20 years you've got a paid asset that cost you nothing...there was some work involved to be sure, but it creates money from nothing.


*it creates money from nothing* he he  from from nothing you can create only nothing 

You also can buy several REITs (comercial, residential, hotel) with 6-7% yield and in 15 years you will double your money only from distributions and no headache to look for tenants, than run after them if they don't pay , renovation and so on. 
But why to take loans? Earn, save, accumulate, invest and ....prosper


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## Just a Guy (Mar 27, 2012)

Well, true, it's technically OPM, but nothing out of my pocket and plenty going into it...much more than your REITs.


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## doctrine (Sep 30, 2011)

For every one of you, Just a Guy, there are at least 20 or more real estate investors who are far less talented, buying overpriced properties that are usually cash flow negative. I do not know personally know a single person like you who makes livable money on rental properties; however, I know at least a couple of dozen people with cash flow negative rental properties. They also spend a significant portion of their lives trying to fix/renovate them in a losing cause. I have read your rental property guidelines, which make complete sense, but they don't even come close. 1% of the purchase price in monthly rent? Some people are at a third of that and are still convinced it's a great idea. I know the property I'm renting right now is cash flow negative for the landlord - good for me, bad for them. I am convinced that for 95%+ of 'casual/recreational' real estate investors, REITs are virtually certain to earn a higher rate of return.


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## gibor365 (Apr 1, 2011)

doctrine said:


> For every one of you, Just a Guy, there are at least 20 or more real estate investors ....


That's what I meant....cannot say better


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## Just a Guy (Mar 27, 2012)

Yes, but for every one stock market investor who makes good returns, how many casual ones are funding those returns with losses?

I know of a guy who lost 120k on a REIT that went bust. Face it, being an investor and being successful is rare compared to the number of participants...the same with debt. Debt made me wealthy, and still does, because I use it wisely. Debt makes a lot of people poor because they don't. It's got nothing to do with the tool, or what you invest in, it has everything to do with the person.


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## doctrine (Sep 30, 2011)

Just a Guy said:


> Yes, but for every one stock market investor who makes good returns, how many casual ones are funding those returns with losses?


I disagree 100% with this statement. Successful investing on public markets does not require funding from investors who are losing money. Public markets, and the companies that comprise them, are by far net creaters of wealth.


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## AltaRed (Jun 8, 2009)

doctrine said:


> I disagree 100% with this statement. Successful investing on public markets does not require funding from investors who are losing money. Public markets, and the companies that comprise them, are by far net creaters of wealth.


Hard to argue with RE cheerleaders.....touche!


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## james4beach (Nov 15, 2012)

Just a Guy said:


> You obviously never owned rental properties...borrow the money to pay for the place, tenants pay for it, in 20 years you've got a paid asset that cost you nothing...there was some work involved to be sure, but it creates money from nothing.


And the USA is full of people who used to think this, but who then got creamed and lost their homes or went into bankruptcy. But for a long time, _everyone _thought this was a no-brainer way to make money.

In fact, American TV has more or less stopped showing all those "rental property" television shows that were all the rage pre-2008. There used to be a zillion television programs showing you how easy it was to go into debt, make a rental property, and make money out of nothing.


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## Maybe Later (Feb 19, 2011)

A quick aside - With fractional reserve banking systems mortgage loans do create money from nothing. It's hard to wrap your head around but when institutions create mortgage loans (a portion of) the money is generated from thin air. It's amazing how invisible it is and easy to see why housing has such an impact on the economy.


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## Plugging Along (Jan 3, 2011)

tygrus said:


> I find it odd that people categorize debt in different ways.
> 
> People have no problem taking out a loan to buy a depreciating car or a get mortgage or load up the credit card. Even most businesses have some sort of debt either rotating or long term. If you told people you had any of these types of debt they wouldn't bat an eye.
> 
> Then why is margin debt a dirty word? If you told people you borrowed money against your stock to buy more stock they would think you lost your marbles. All debt has risk, why does this seem to have more in people's minds?


I do look at debt in different ways.... Debt that takes money out of my pocket and gives me no additional value, is bad debt.... This includes credit card, car debt, or any consumer debt, and possibly a mortgage if it's for your main home.... I am on the fence about the principle residence, because it can appreciate in value.... Debt that helps increase my networth or cash flowis good debt... This include rental real estate, investments, education in an area where it will advancement my career.



doctrine said:


> For every one of you, Just a Guy, there are at least 20 or more real estate investors who are far less talented, buying overpriced properties that are usually cash flow negative. I do not know personally know a single person like you who makes livable money on rental properties; however, I know at least a couple of dozen people with cash flow negative rental properties. They also spend a significant portion of their lives trying to fix/renovate them in a losing cause. I have read your rental property guidelines, which make complete sense, but they don't even come close. 1% of the purchase price in monthly rent? Some people are at a third of that and are still convinced it's a great idea. I know the property I'm renting right now is cash flow negative for the landlord - good for me, bad for them. I am convinced that for 95%+ of 'casual/recreational' real estate investors, REITs are virtually certain to earn a higher rate of return.





Just a Guy said:


> Yes, but for every one stock market investor who makes good returns, how many casual ones are funding those returns with losses?
> 
> I know of a guy who lost 120k on a REIT that went bust. Face it, being an investor and being successful is rare compared to the number of participants...the same with debt. Debt made me wealthy, and still does, because I use it wisely. Debt makes a lot of people poor because they don't. It's got nothing to do with the tool, or what you invest in, it has everything to do with the person.


If I go back to my top statement, debt that increases my networth or financial cash flow is good debt. It can be done in both real estate and stocks, and it can be posts equally too. It really depends on what you know and are comfortable with.

I have borrowed money for real estate, and have made money and lost money. One of my winners I got for $75k everyone thought we over paid, it's worth over $250k and cash flow positive always, four months vacant on 14 years. My loser, we bought as a vacation rental property at the height of the market, paid, $180k, there are some foreclosing for $100k. Never managed to rent it out, but or kids love it and will not let us sell. So just a paper lost, as we are enjoying it. I know what I am doing with real estate, and in the long term it has made me money, so I am okay with debt for it. 

For stocks, I have lost so much you cannot imagine, but the only one I borrowed on was my worst and best case, I borrowed money to invest, I bought $160k in stock, watched it drop to $80k in just a few months. It was a good stock, so I bought as much as I could but ran out of money and didn't think I should borrow more cause I wasn't working. I held on for a while and sold at a profit of $30k. I am not sure If I will ever borrow again to invest not because stocks are a bad idea, but they are a bad idea for ME. I do invest in stocks without borrowing money though. 

I find with stocks, the reason I personally find them riskier is that because they are easy to buy and sell compared to real estate, it is easier to act and react to impulse. I have many times just bought stocks on an impulse or hunch, but real estate I take the time to the run the numbers.


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## Just a Guy (Mar 27, 2012)

I remember house flipping shows, not many rental ones...however I wasn't buying too much before 2008, I think I only bought 1 over the 5 years between 2003-2008...just couldn't find anything that made sense. I almost stopped looking completely, then the market corrected a bit, some panic, and suddenly some deals appeared. 

Of course, when mainstream media gets involved it's usually a good indicators to get out.

I think there is a big difference between owning investments and being an investor...same as being a gambler vs. an investor.


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## tygrus (Mar 13, 2012)

People seem to have entrenched views on money and debt just based on this thread, but people also have skewed views on losing money. Most categorize losses as a stock goes down or some company goes bankrupt or rental properties do not cover their costs etc etc.

But two unspoken ways to losing money are inflation and opportunity cost as well. They are just less ubiquitous. GICs are money losers. Cash is money loser. HISA are a money loser.


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## gibor365 (Apr 1, 2011)

Just a Guy said:


> Yes, but for every one stock market investor who makes good returns, how many casual ones are funding those returns with losses?
> 
> I know of a guy who lost 120k on a REIT that went bust.


Probably if you buy some exotic REIT and will throw all $$ there you can be screwed... But take as example the biggest Canadian no-brainer REIT REI.UN. If you bought it 20 years ago, your return will be 576% on appreciation only + 200% on distributions only....I doubt you can get it even close with rentals


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## KaeJS (Sep 28, 2010)

tygrus said:


> Then why is margin debt a dirty word? If you told people you borrowed money against your stock to buy more stock they would think you lost your marbles. All debt has risk, why does this seem to have more in people's minds?


In short: People are stupid.


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## tygrus (Mar 13, 2012)

All debt requires cash flow to cover it, whether its earned income or investments or rentals whatever. And earning that income to cover it always is uncertain. You could lose your job tomorrow or get a bad renter who doesn't pay for 6 months like I had.

I talked in dept with the folks at RBC about margin investing and they simply said if you have cushion in your margin account, you will never get a margin call. So I leave about $20k in there just for those unexpected drops.


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## Plugging Along (Jan 3, 2011)

tygrus said:


> All debt requires cash flow to cover it, whether its earned income or investments or rentals whatever. And earning that income to cover it always is uncertain. You could lose your job tomorrow or get a bad renter who doesn't pay for 6 months like I had.
> .



Good point. However, some debt has no way of ever covering its own cash flow, I consider that bad debt. Those that may cover its cash flow is better debt. How well you know those investments will mitigate your risk. My family has been in real estate for almost 4 decades. Even when the vacancy rates were awful In 80's, we have never had 6 months of no rent. 

In a case like rentals, you have to potential for both income through rents and capital gains.


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## Just a Guy (Mar 27, 2012)

Also, if you are just starting in real estate, if you own one place, and it goes vacant, you're on the hook for 100% of the expenses. If you own a bunch, and one goes vacant, the others can cover the vacant one. 

Also, after 17 years or so, if you mortgage it for 20 years biweekly rapid, you've got a clear title place earning close to 80% profit...

It all depends on how you do it. You amortize 35 years, never pay it down, pay too much, don't get involved in the board of the condo, don't screen tenants, etc. it's easy to say it doesn't work. 

Same with stocks, you buy some hot stock, with no earnings, run by some 20 year old, and then wonder why your retirement funds are gone...

Investing is work, if you just want to sit back and play it safe, buy a gic and lose money slowly. If you work at limiting the risks, you can generate very big returns. You want someone else to do the work for you and just benefit from it, you wind up in an episode of American greed a victim of some Ponzi scheme.


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## RBull (Jan 20, 2013)

I thought you were out of the market.


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## tygrus (Mar 13, 2012)

RBull said:


> I thought you were out of the market.


Tip toeing back in my friend


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## lonewolf (Jun 12, 2012)

Just a Guy said:


> Investing is work, if you just want to sit back and play it safe, buy a gic and lose money slowly. If you work at limiting the risks, you can generate very big returns. You want someone else to do the work for you and just benefit from it, you wind up in an episode of American greed a victim of some Ponzi scheme.


 In the early 80s the high interest rates kept the masses out of the market which was a time to buy. Now the low interest rates helped to bring the masses back into the market..

The baby boomers pushed interest rates high with their mortgages to buy homes, They have pushed stocks higher as they invest for their retirement, Soon they will start to sell stocks & bonds. The baby boomers helped the generation before them become rich.


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## RBull (Jan 20, 2013)

tygrus said:


> Tip toeing back in my friend


Good luck with your strategy. 

RE debt I'm one of those that doesn't like it. I do bat an eye at the significant debt many take on. Always cash/equivalent for cars & major purchases, mortgage paid in 5 years, no cc debt beyond monthly auto pay, no debt for my business etc. 

Have done rentals with leverage and traded futures many years ago though. No more. In retirement outlook changes a lot.


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## Nemo2 (Mar 1, 2012)

_"And borrowing dulls the edge of husbandry."_

Hamlet Act 1, scene 3, 75–77


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## HaroldCrump (Jun 10, 2009)

tygrus said:


> Tip toeing back in my friend


Why are you buying back in at the top of the market?


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## RBull (Jan 20, 2013)

^We don't know we're at the top but have certainly had a good run.


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## tygrus (Mar 13, 2012)

HaroldCrump said:


> Why are you buying back in at the top of the market?


What top? REITs still look unloved to me.


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## HaroldCrump (Jun 10, 2009)

RBull said:


> ^We don't know we're at the top but have certainly had a good run.


*I *am not the one saying it is the top.
When he bailed, he said this is top.


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## HaroldCrump (Jun 10, 2009)

tygrus said:


> What top? REITs still look unloved to me.


So you are buying back in only into the REITs?
From what I can tell, there has been no significant change in REIT valuations in the last 2 - 3 months.


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## RBull (Jan 20, 2013)

HaroldCrump said:


> *I *am not the one saying it is the top.
> When he bailed, he said this is top.


Fair enough. I didn't say *you* said it is the top, although that's splitting hairs and I think we're on the same page here.

The market is higher now by around ~1.3% than it was at that time IIRC and seems we're going for a "new and improved top" today.


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## namelessone (Sep 28, 2012)

It's the result that most people want to walk an easy path. Easy path = mediocre result. Challenging path = extraordinary result. 
Borrowing money and spending it is effortless and predictable in the process. They don't need to think. They don't realize the suffering it brings in the future. 
On the other hand, borrowing money and generating a respectable return is hard for most people. That's where the opportunities appear for the enterprising people. If enough people are doing it, then opportunities disappear. The good news is most people ignore them.

P.S. Margin loan is my favorite type of debt because of its low cost and flexibility.


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## RBull (Jan 20, 2013)

^That's a remarkable "spin" on investing with margin. 

If one has a lower risk tolerance they "walk an easy path". If one investments without margin they have only a "mediocre result", don't realize the "suffering it brings in the future", and they "don't need to think". 

I've guess I've thoughtlessly "suffered" my way into a pretty comfortable early retirement.


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## namelessone (Sep 28, 2012)

RBull said:


> ^That's a remarkable "spin" on investing with margin.
> 
> If one has a lower risk tolerance they "walk an easy path". If one investments without margin they have only a "mediocre result", don't realize the "suffering it brings in the future", and they "don't need to think".
> 
> I've guess I've thoughtlessly "suffered" my way into a pretty comfortable early retirement.



RBull, please read carefully. 
I was comparing borrowing to spend vs borrowing to invest which is on the same topic as the OP.

To expand more, yes, get a car loan to buy a car is effortless initially but suffer in the long term. 

Borrowing at 2% and get 20% return takes some thinking but will reach FI much sooner than without OPM.


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## RBull (Jan 20, 2013)

namelessone said:


> RBull, please read carefully.
> I was comparing borrowing to spend vs borrowing to invest which is on the same topic as the OP.
> 
> To expand more, yes, get a car loan to buy a car is effortless initially but suffer in the long term.
> ...


Fair enough. In that light we agree.


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## john williams (Sep 12, 2014)

I don't think, debt is bad and also debt is not good. Debt provide a facility to get a car or mortgage, but you have to repay your debt according to the agreement.If you cannot pay your debt then it will be bad and if you can pay your debt then it is good.


tygrus said:


> I find it odd that people categorize debt in different ways.
> 
> People have no problem taking out a loan to buy a depreciating car or a get mortgage or load up the credit card. Even most businesses have some sort of debt either rotating or long term. If you told people you had any of these types of debt they wouldn't bat an eye.
> 
> Then why is margin debt a dirty word? If you told people you borrowed money against your stock to buy more stock they would think you lost your marbles. All debt has risk, why does this seem to have more in people's minds?


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