Latest / The Loan Daddy Podcast / 018 - Good Debt vs Bad Debt: Why a 5M-Sub Investor Paid Off His 2.875% Mortgage

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018 - Good Debt vs Bad Debt: Why a 5M-Sub Investor Paid Off His 2.875% Mortgage · The Loan Daddy Podcast

• 0:00
  SPEAKER_01: The same guy who is now saying paying off my mortgage gave me peace of mind can also say using mortgages has helped me build my wealth.
• 0:08
  SPEAKER_01: What's up, everybody?
• 0:09
  SPEAKER_01: Welcome to the Lone Daddy Podcast, episode 18.
• 0:12
  SPEAKER_01: Today I want to talk about debt.
• 0:14
  SPEAKER_01: Good debt, bad debt, and maybe more importantly, how consumers feel about debt.
• 0:20
  SPEAKER_01: Because I think there's been a bit of a mindset shift.
• 0:23
  SPEAKER_01: We went through this incredible period where mortgage rates were at 4% or even 3%, and in some cases, even 2%.
• 0:31
  SPEAKER_01: And naturally it was a lot easier to get comfortable with debt when someone was lending you money at, let's just say, 2.75%.
• 0:40
  SPEAKER_01: Today, mortgage rates are higher, home prices are considerably higher, and one's monthly payment has become a much bigger part of the conversation.
• 0:51
  SPEAKER_01: So naturally, people are looking at debt differently or thinking about debt differently.
• 0:56
  SPEAKER_01: And just for added context, I think it's always important to look back at historical rates.
• 1:00
  SPEAKER_01: So if you look at a chart like this, you'll see where interest rates were throughout the decades.
• 1:06
  SPEAKER_01: And yes, whenever we put up something like this, someone will inevitably say or think to themselves, yes, interest rates were at 10%, 12% or higher, but homes at that time were around$100,000.
• 1:19
  SPEAKER_01: And that's a totally fair point, but incomes were also dramatically lower than as well.
• 1:24
  SPEAKER_01: So you have to look at the entire picture: home prices, incomes, rent, inflation, all of it.
• 1:30
  SPEAKER_01: But here's why I'm bringing this up for real estate agents.
• 1:33
  SPEAKER_01: If the mindset of the consumer changes, our conversations have to change too.
• 1:39
  SPEAKER_01: Now, this doesn't mean that our principles change.
• 1:41
  SPEAKER_01: It just means that how we communicate those principles will change.
• 1:45
  SPEAKER_01: And I'm going to use my beloved New York Knicks as an example of this.
• 1:50
  SPEAKER_01: Everyone knows, everyone who knows me knows that I'm a huge Knicks fan.
• 1:54
  SPEAKER_01: I've been a fan since basically I was born.
• 1:56
  SPEAKER_01: And unless you've been living under rock, you know that the New York Knicks won the NBA championship this past year.
• 2:02
  SPEAKER_01: I think one of the main reasons why they were able to get over that hump and finally win a championship after 50 some odd years is because they were able to adapt.
• 2:10
  SPEAKER_01: There were certain principles that the Knicks were not willing to compromise on, right?
• 2:14
  SPEAKER_01: And that was playing hard, playing together, being unselfish.
• 2:18
  SPEAKER_01: Those were foundational to who they were.
• 2:21
  SPEAKER_01: But strategy, your offensive philosophy, your defensive philosophy, how you respond to what the other team is doing, you better be willing to adapt and able to adapt.
• 2:33
  SPEAKER_01: The Knicks had a very successful coach before their current coach, Mike Brown, but their former coach was too rigid, or at least it was criticized for being too rigid and kind of stuck in his own ways.
• 2:44
  SPEAKER_01: Mike Brown and his staff, to their credit, were able to adapt.
• 2:49
  SPEAKER_01: They listened to their players.
• 2:51
  SPEAKER_01: They went against some of their own ideas because they adapted to what they were seeing on the court.
• 2:58
  SPEAKER_01: One coach, Mike Brown, won the championship.
• 3:01
  SPEAKER_01: The other coach is no longer coaching because one adapted.
• 3:05
  SPEAKER_01: There's a lesson in here for all of us.
• 3:07
  SPEAKER_01: And that is you can keep your principles without keeping the exact same strategy.
• 3:13
  SPEAKER_01: And I think we can apply that to how we think about and talk about debt.
• 3:16
  SPEAKER_01: Because there's another phenomenon happening in society today that I think is influencing financial decisions.
• 3:24
  SPEAKER_01: Vibes.
• 3:25
  SPEAKER_01: Are the vibes good?
• 3:26
  SPEAKER_01: We joke about people voting for politicians based on vibes alone.
• 3:30
  SPEAKER_01: What policies do you like about that person?
• 3:32
  SPEAKER_01: I don't know.
• 3:33
  SPEAKER_01: I just like their vibe.
• 3:34
  SPEAKER_01: Obviously, I'm being a little facetious here, but there's something real underneath all this.
• 3:38
  SPEAKER_01: And that is human beings don't make all financial decisions purely based on math.
• 3:44
  SPEAKER_01: We make them based on emotion, comfort, fear, and security.
• 3:49
  SPEAKER_01: And then sometimes we use the math to justify the decision that we've already made.
• 3:53
  SPEAKER_01: Which brings me to a video I came across recently from Graham Stephen.
• 3:58
  SPEAKER_01: If you don't know Graham, he's a massive YouTuber with over 5 million subscribers.
• 4:04
  SPEAKER_01: He's a real estate investor who has talked about investing and real estate and debt for years.
• 4:10
  SPEAKER_01: And I have a ton of respect for him.
• 4:13
  SPEAKER_01: I watch a lot of his content.
• 4:14
  SPEAKER_01: And the title of his most recent video really caught my attention.
• 4:17
  SPEAKER_01: And that title is I paid off my 2.875% mortgage.
• 4:22
  SPEAKER_01: Dave Ramsey was right.
• 4:24
  SPEAKER_01: Now, Dave Ramsey, who is the author and radio host, has famously advocated for living a debt-free lifestyle for decades.
• 4:33
  SPEAKER_01: Now, Graham historically has come from almost the complete opposite school of thought.
• 4:41
  SPEAKER_01: If you can borrow money cheaply and earn a higher return somewhere else, why would you rush to pay off that cheap debt?
• 4:49
  SPEAKER_01: But Graham's thinking has evolved.
• 4:51
  SPEAKER_01: Listen to this.
• 4:52
  SPEAKER_00: After years of telling people not to pay off low interest rate debt and arbitrage your money in the market to make more money instead, I'm starting to think that maybe I was wrong.
• 5:03
  SPEAKER_00: Like mathematically, we all know it makes sense not to pay off the 3% mortgage because you could earn way more money in the stock market.
• 5:11
  SPEAKER_00: And below a certain point, it's pretty much like getting free money.
• 5:14
  SPEAKER_00: But recently, I did the unthinkable.
• 5:16
  SPEAKER_00: I got rid of three super low interest rate mortgages that I never thought I would do.
• 5:21
  SPEAKER_00: And as soon as they were gone, it just felt like a weight was lifted off my shoulders in a way that I never thought was possible before.
• 5:30
  SPEAKER_01: Later on in the video, he goes on to explain what actually happened when he paid off these really low mortgage rates.
• 5:38
  SPEAKER_00: Honestly, I didn't even think this would be a thing until I started selling off my real estate.
• 5:43
  SPEAKER_00: I'm talking the ones with 2.875% mortgages fixed for 30 years.
• 5:49
  SPEAKER_00: And once those were sold, and I saw the debt category on my Rocket Money account drop by millions of dollars, it just felt like an odd sigh of relief.
• 6:01
  SPEAKER_00: Like I wasn't worried about like not making the mortgage payments or anything, but just seeing the debt category go down was a really good freeing feeling for some reason.
• 6:12
  SPEAKER_00: I feel like I'm doing a really bad job at describing what it was like, but it was as though something was taking up mental space in my head that I didn't even know existed until it was gone.
• 6:23
  SPEAKER_00: And then when it was gone, even though, again, mathematically it was the wrong choice to give up low interest rate mortgages, just felt really nice.
• 6:32
  SPEAKER_01: Now, this is the part I find fascinating.
• 6:34
  SPEAKER_01: He's essentially saying the math said one thing and my feelings said something else.
• 6:40
  SPEAKER_01: He knew that keeping an interest rate at 2.875% made a lot of financial sense.
• 6:47
  SPEAKER_01: But paying it off felt incredible.
• 6:49
  SPEAKER_01: It gave him relief, it gave him peace of mind, it simplified his life.
• 6:54
  SPEAKER_01: And I don't think we should dismiss that.
• 6:56
  SPEAKER_01: There's value in sleeping better at night.
• 6:59
  SPEAKER_01: There's value in peace of mind, obviously.
• 7:01
  SPEAKER_01: Personal finance is personal.
• 7:03
  SPEAKER_01: But here's where I want to challenge you, and I think there's an important lesson here for real estate agents.
• 7:08
  SPEAKER_01: Just because something feels better doesn't necessarily mean that it's the best financial decision.
• 7:13
  SPEAKER_01: And on the flip side of that, just because something is mathematically optimal does not mean it's the right decision for every person.
• 7:23
  SPEAKER_01: Both things can be true.
• 7:25
  SPEAKER_01: So instead of asking, is debt good or bad, I think the better question is what is the debt being used for?
• 7:32
  SPEAKER_01: Credit card debt at 25% rates because you're trying to finance a lifestyle that you can't afford.
• 7:39
  SPEAKER_01: That's one conversation.
• 7:41
  SPEAKER_01: Borrowing money to buy an asset while preserving liquidity and giving yourself the opportunity to invest that capital elsewhere, that's a very different conversation.
• 7:51
  SPEAKER_01: A mortgage is leverage, and leverage isn't inherently good nor inherently bad.
• 7:56
  SPEAKER_01: It's a tool.
• 7:57
  SPEAKER_01: A hammer can be used to build a home or to smash a window.
• 8:01
  SPEAKER_01: The question isn't whether the hammer is good or bad.
• 8:04
  SPEAKER_01: The question is how are you using that hammer?
• 8:06
  SPEAKER_01: And this is where I think agents can have really valuable, insightful conversations with their client.
• 8:13
  SPEAKER_01: You work in real estate, so presumably you believe in the long-term value of owning real estate.
• 8:19
  SPEAKER_01: So when you're working with a buyer, particularly someone with substantial liquidity, don't automatically assume that paying cash is the answer.
• 8:27
  SPEAKER_01: You can ask them why do they want to pay cash?
• 8:30
  SPEAKER_01: Maybe they simply hate debt.
• 8:32
  SPEAKER_01: Okay, that's valuable information.
• 8:33
  SPEAKER_01: Maybe they think their offer won't get accepted with financing.
• 8:38
  SPEAKER_01: That's a different conversation where you talk about weaving contingencies, et cetera.
• 8:42
  SPEAKER_01: Maybe they think financing will take too long.
• 8:45
  SPEAKER_01: Maybe they think uh taking a mortgage is financially irresponsible.
• 8:50
  SPEAKER_01: Maybe nobody has ever explained to them the alternative.
• 8:53
  SPEAKER_01: Because here's the part that so many consumers miss.
• 8:56
  SPEAKER_01: Every dollar you put into a property is a dollar that you could not deploy elsewhere.
• 9:01
  SPEAKER_01: Let's make this really simple.
• 9:03
  SPEAKER_01: Imagine someone has a million dollars and they want to buy a million dollar property.
• 9:08
  SPEAKER_01: They could use the million dollars and pay cash for a property and own it free and clear, which is great.
• 9:14
  SPEAKER_01: Or maybe they take$400,000 and put that down as a down payment and they finance$600,000.
• 9:21
  SPEAKER_01: Now they own that same$1 million property, but they have an extra$600,000 in the bank.
• 9:28
  SPEAKER_01: What could they do with that$600,000?
• 9:30
  SPEAKER_01: Maybe nothing.
• 9:31
  SPEAKER_01: Maybe they just keep a larger emergency reserve.
• 9:34
  SPEAKER_01: Maybe they invested in stocks and diversify outside of real estate.
• 9:38
  SPEAKER_01: Maybe they buy another property.
• 9:39
  SPEAKER_01: Maybe they they do some kind of combination of all three.
• 9:43
  SPEAKER_01: There are obviously risks.
• 9:45
  SPEAKER_01: Investments can lose money, real estate can decline, debt creates a monthly obligation, and leverage magnifies losses just like it can magnify returns.
• 9:55
  SPEAKER_01: That's why the conversation isn't mortgage or no mortgage.
• 9:58
  SPEAKER_01: The conversation is what's the best use of your capital?
• 10:02
  SPEAKER_01: And I want to be careful here.
• 10:03
  SPEAKER_01: I know I'm the mortgage guy.
• 10:04
  SPEAKER_01: I know how this can sound.
• 10:06
  SPEAKER_01: Breaking news, mortgage guy thinks everyone should get a mortgage.
• 10:09
  SPEAKER_01: That's not my point.
• 10:10
  SPEAKER_01: There are absolutely people out there who should pay all cash.
• 10:14
  SPEAKER_01: There are people who should not be taking on additional debt.
• 10:18
  SPEAKER_01: There are people for whom the peace of mind of owning real estate debt-free is worth more than any potential return they can earn elsewhere.
• 10:29
  SPEAKER_01: And if that's you, great, but make that decision consciously.
• 10:32
  SPEAKER_01: Don't make it because we've suddenly decided that all debt is bad.
• 10:37
  SPEAKER_01: Because interestingly enough, Graham himself talks about how leverage and taking out loans has helped him build his real estate portfolio.
• 10:48
  SPEAKER_01: Early in his career, he talks about buying three properties for$60,000 in cash each.
• 10:55
  SPEAKER_01: Looking back, he says he could have bought 12 properties by putting down 25% down instead.
• 11:00
  SPEAKER_01: And those properties increased in value dramatically for him.
• 11:05
  SPEAKER_01: That's the other side of leverage.
• 11:07
  SPEAKER_01: He used mortgages later in his career to acquire more real estate while still keeping capital available for other investments.
• 11:15
  SPEAKER_01: And this has helped him build tremendous wealth.
• 11:18
  SPEAKER_01: So there's some irony here, right?
• 11:20
  SPEAKER_01: The same guy who is now saying paying off my mortgage gave me peace of mind can also say using mortgages has helped me build my wealth.
• 11:28
  SPEAKER_01: And those statements aren't contradictory.
• 11:30
  SPEAKER_01: They're different stages of someone's financial life.
• 11:34
  SPEAKER_01: Maybe when you're 30 or 40 and actively trying to build your wealth, you are willing to accept more leverage.
• 11:40
  SPEAKER_01: And maybe when you're 60 and you've accumulated everything that you need, your priority becomes protecting what you've built and simplifying your life.
• 11:49
  SPEAKER_01: And that's why there isn't one answer here.
• 11:51
  SPEAKER_01: But there's one more statistic I want to leave you with.
• 11:53
  SPEAKER_01: According to the Fed's most recent survey of consumer finances, the average net worth of a homeowner is$396,000.
• 12:02
  SPEAKER_01: For renters and other non-homeowners, that average is$10,400.
• 12:09
  SPEAKER_01: Now, I want to be careful with that stat.
• 12:11
  SPEAKER_01: That does not mean owning a home immediately makes you 40 times wealthier.
• 12:16
  SPEAKER_01: People who become homeowners are different financially in a lot of ways, but it does illustrate something important here.
• 12:22
  SPEAKER_01: Homeownership has historically been one of the major ways that people accumulate wealth.
• 12:28
  SPEAKER_01: You're buying an asset, you're paying down principal, you're building equity.
• 12:33
  SPEAKER_01: And historically, over long periods of time, real estate has appreciated.
• 12:38
  SPEAKER_01: So maybe the lesson isn't debt is good, and it certainly isn't debt is bad.
• 12:43
  SPEAKER_01: Maybe the lesson here is debt should have a job.
• 12:46
  SPEAKER_01: If you're borrowing money to fund a lifestyle that you can't afford, that's a problem.
• 12:50
  SPEAKER_01: If you're borrowing money without understanding the risk, that's a problem.
• 12:54
  SPEAKER_01: But if you're thoughtfully borrowing money to accumulate assets, preserve liquidity, diversify your investments, or potentially purchase additional real estate, that is a completely different use of debt.
• 13:09
  SPEAKER_01: And that's the conversation I think agents should be comfortable having.
• 13:13
  SPEAKER_01: So if someone says that they're paying all cash, you don't automatically say you should get a mortgage, but you could say, before you put all of your cash into this property, let's make sure we've thought about what else your money could be doing for you.
• 13:25
  SPEAKER_01: Then bring in your financial advisor, your accountant, your mortgage professional.
• 13:30
  SPEAKER_01: Look at the numbers, look at the risk, and then make an educated decision.
• 13:34
  SPEAKER_01: Because vibes do matter.
• 13:36
  SPEAKER_01: Peace of mind matters, emotion matters.
• 13:38
  SPEAKER_01: But when you're making one of the biggest financial decisions of your life, the math part of it has to be factored in.
• 13:46
  SPEAKER_01: And if you can help your clients understand both sides of the equation here, you are becoming more than just a real estate agent for them.
• 13:55
  SPEAKER_01: You're helping them think about real estate as part of their entire financial profile.
• 14:02
  SPEAKER_01: And ultimately, that is what being a great advisor is all about.
• 14:05
  SPEAKER_01: Feel free to put into the comments how you speak to your clients about debt and conversations like this and financing and for those who are going all cash.
• 14:14
  SPEAKER_01: What are the advantages and disadvantages that you see?
• 14:16
  SPEAKER_01: Please share them.
• 14:17
  SPEAKER_01: Thank you so much for listening, and I will see you on the next episode of the Lone Daddy Podcast.
• 14:21
  SPEAKER_01: Take care.