To Debt or Not to Debt: Which Makes Sense for You?
Which is better for you: Being completely debt-free, or having some debt and owning a home?
Most people would probably prefer to be debt-free. But that’s a very difficult hurdle to overcome. Some will spend years clearing student loan debt, credit cards, or car loans.
That’s an enormous financial burden — but not necessarily for the reasons you think.
When you focus on paying off debt, and put off buying a home, you lose the opportunity to build wealth. That’s very costly in the long term. Because one of the best ways to benefit from homeownership is to buy early in your life (well, as early as you can).
It’s called the “time in” factor. The sooner you responsibly and intelligently employ leverage to achieve a financial goal, the longer you’ll have to build wealth.
Time in = Long Term Prosperity
Think about this. Let’s say you’re 26, and you have $36,000 in student debt. The payments are reasonable; you don’t have a lot of credit card debt, and you have a car loan. You have some money in the bank beyond your basic emergency fund. You make a reasonable salary, and you’re not a profligate spender.
To me, you’re an ideal client: someone who has shown that they can handle debt responsibly and has the resources to buy a home.
What’s that, you say? What about 20 percent down? Don’t I have to save for years and years? Don’t I have to be debt-free?
No. You don’t. And there’s a strong argument to be made that you probably shouldn’t, so you can start benefiting from the time-in factor. Besides, since you must live somewhere, why not make it work for you? All that money you’re spending on rent could be used to build your wealth.
The Opportunity Cost of Paying it All Off
Let’s look at two scenarios.
You save for years and years, clear your debt and finally have 20 percent down for a house thanks to your discipline and thrift. All the while, you’ve rented a series of nice apartments and grown your nest egg. But it took you eight years to do, and in the meantime, the housing market has appreciated by 25 percent. Now your down payment is smaller in relation to what you want to buy. Not pretty.
You decide that you’re going to get in the market sooner rather than later. Your debts are manageable. You’ve got a steady job. Your mother is proud of you. And over the same period, you buy a $400,000 house with three percent down (just $12,000). The house appreciates by 25 percent. Now you’ve made $100,000 on your $12,000 investment, which by any standard is a pretty good return. And even better, that $100,000 is tax-free because it’s under the $250,000 capital gains cap for single people or $500,000 for married couples. Of course, the tax breaks you got for your mortgage interest and property tax made your house less expensive than renting, but that’s all gravy.
Let’s add in a few other points. If you make minimum payments on your student loans and other debts while maxing out your 401k every year, which strategy would put you in better shape? Using debt as leverage, or paying it off in hard money?
I know what your grandparents might say (pay it off!), but today’s world is full of choices.
Wealth Through Leverage
I’ve devoted my career to helping people build wealth through leverage — and my preferred leverage is mortgage loans. Obviously, I’m biased. But I believe that you should make informed, long-term decisions about your financial life. Some of those decisions might be novel, like allowing yourself to carry some debt to achieve a better outcome 10 years from now.
Every cycle is different, but one thing is very clear: It’s your time-in (not timing) the market that leads to long-term prosperity and wealth creation. Wealth creation takes time, and you need as much as you can get.
In a world where time is truly money, it’s an important question. The sooner you responsibly invest (whether that’s in a home, the stock market, bonds, commercial real estate, etc.), the better off you’re likely to be. I can help you with the housing component of your portfolio.
I’d like to help you make the right choice for you and your future, so you build wealth with every month and year that passes. Quite simply, we help you build wealth early so that you can have the life you want … for your whole life.
So, when is your “time in”? Let’s talk about it!