RK vs. GC (Interesting "chat" about RE investing in today's market)

[starttoday123]

you're goofy

You may be right lol

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MJ DeMarco]

Like someone posted before, I'd pay $25/mo subscription to never see these two guys again in my life.

 

[MitchC]

You're a goofy guy, Steve.

Lol.

Just kidding.

I understand the mathematical reason for it. Still, I prefer peace of mind over financial gains.

When I bought my car, I was forced to lease it due to tax reasons (otherwise it would have been ridiculously expensive and I'm not a guy who gifts the government tax money).

I paid as much as I could in advance to owe as little as possible. For 3 years, I absolutely f*cking hated paying the monthly payments and actually regretted not paying in cash (even though it would have meant losing a lot of money).

As for business - I myself would never buy a business if I couldn't afford it. I understand there might be a huge upside... but there might also be a huge downside and a lot of pain for many years.

To be fair to him those were my words not his but your post is an example of exactly the point he is trying to make.

Not getting into debt to buy a business or property that makes sense is something that will hold you back from getting to his level, and especially getting there as quickly as you could.

I’m exactly the same as you with debt, I actually was saving to pay cash for my first home I hate debt so much, but hearing him explain it definitely shocks you into realising you are thinking too small and that it’s a limiting thing.

If I bought my home sooner with debt, which I ended up having to do anyway due to inflation, I would be hundred of thousands better off, if I leveraged right up and bought more than one, I’d be absolutely laughing. Sure that’s hindsight as well with the biggest realestate boom in history but that’s exactly his point.

The video Andy posted above is awesome as well. He talks about getting rid of your worthless paper to buy real estate, and then refinancing to get more worthless paper. That money you get from refinancing and not selling is actually debt not income so you pay no tax on it, unlike if you sold the property. That’s another example of debt being a good thing.

There are gurus and books that talk about debt being bad and a way to get yourself into massive depressing trouble, and they have a point too. Richest man in Babylon is one. Dave Ramsay is another. But as Steve mentioned, we are talking about good debt.

Grants point might be better summarised that not going into debt is something that could hold you back.

 

[biophase]

You're a goofy guy, Steve.

Lol.

Just kidding.

I understand the mathematical reason for it. Still, I prefer peace of mind over financial gains.

When I bought my car, I was forced to lease it due to tax reasons (otherwise it would have been ridiculously expensive and I'm not a guy who gifts the government tax money).

I paid as much as I could in advance to owe as little as possible. For 3 years, I absolutely f*cking hated paying the monthly payments and actually regretted not paying in cash (even though it would have meant losing a lot of money).

As for business - I myself would never buy a business if I couldn't afford it. I understand there might be a huge upside... but there might also be a huge downside and a lot of pain for many years.

Here's another scenario. A person has $1,000,000 in his stock account that he started with $1. Now he wants to buy a house for $500,000. If he sells $500k in stock, he has to pay taxes on the gain, so he pays $150k and is left with $350k. So he really needs to sell $700k of stock to buy a $500k house. So it's like overpaying by $200k!

So instead he gets a regular loan on the house for $500k. Or he gets a collateral loan against his $1M stock. Obviously, there's a chance this person's stock portfolio may drop and now he has no house or money.

There are many scenarios where as you start to accumulate wealth, you start borrowing against it instead of selling it and paying for it outright. It just doesn't make any sense at some point to use your own money.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[ShamanKing]

Off topic question but Steve have you ever met Stefan Aarnio?

 

[Kung Fu Steve]

Off topic question but Steve have you ever met Stefan Aarnio?

No I don't, sorry. :-(

Here's another scenario. A person has $1,000,000 in his stock account that he started with $1. Now he wants to buy a house for $500,000. If he sells $500k in stock, he has to pay taxes on the gain, so he pays $150k and is left with $350k. So he really needs to sell $700k of stock to buy a $500k house. So it's like overpaying by $200k!

So instead he gets a regular loan on the house for $500k. Or he gets a collateral loan against his $1M stock. Obviously, there's a chance this person's stock portfolio may drop and now he has no house or money.

There are many scenarios where as you start to accumulate wealth, you start borrowing against it instead of selling it and paying for it outright. It just doesn't make any sense at some point to use your own money.

When you first started in RE, you leveraged a lot, yeah?

I'm trying to remember if you ever had more than single-family spots.

 

[biophase]

When you first started in RE, you leveraged a lot, yeah?

I'm trying to remember if you ever had more than single-family spots.

I got traditional loans with 20% down. I only bought SFH. But then I slowly paid my homes off instead of buying more.

If it wasn’t for leverage I wouldn’t have been able to buy anything. My wealth would be so much lower right now if I had to pay cash for everything.

I think you are at a huge disadvantage if you aren’t using loans. You are shorting your potential net worth by orders of magnitude.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Antifragile]

I got traditional loans with 20% down. I only bought SFH. But then I slowly paid my homes off instead of buying more.

If it wasn’t for leverage I wouldn’t have been able to buy anything. My wealth would be so much lower right now if I had to pay cash for everything.

I think you are at a huge disadvantage if you aren’t using loans. You are shorting your potential net worth by orders of magnitude.

Leverage is an amplifier​

Leverage is an amplifier of the gains and losses asymmetry.

Say you have $100 and borrow $400 to purchase an asset for $500. If the asset goes up by 20 per cent and you sell it, you get back $200, great news – you doubled your money.

Unfortunately, the reverse is true too. If a developer who invested $100 and borrowed $400 to develop an asset with projected valuation of $575 (15 per cent profit) were to see a drop of 20 per cent, the value drops to $460. After repaying the lender $400, that leaves only $60.

This example shows that a 20 per cent drop on a 15 per cent profit margin led to a developer losing 40 per cent of their initial equity! Leverage is an amplifier of gain/loss asymmetry.

 

[doster.zach]

After listening to the conversation it's clear they are just thinking at 2 different "levels". The conversation between Grant Cardone and Alex Hormozi was much more fluid because they are looking at billion dollar pictures.

Grant's advice isn't bad, it just doesn't apply to anyone without millions of dollars.

 

[Kung Fu Steve]

Grant's advice isn't bad, it just doesn't apply to anyone without millions of dollars.

That's the question though, right?

Is that actually true?

Is it possible to get in on these deals without millions? How would you leverage it? What value could you bring?

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MTF]

Here's another scenario. A person has $1,000,000 in his stock account that he started with $1. Now he wants to buy a house for $500,000. If he sells $500k in stock, he has to pay taxes on the gain, so he pays $150k and is left with $350k. So he really needs to sell $700k of stock to buy a $500k house. So it's like overpaying by $200k!

So instead he gets a regular loan on the house for $500k. Or he gets a collateral loan against his $1M stock. Obviously, there's a chance this person's stock portfolio may drop and now he has no house or money.

There are many scenarios where as you start to accumulate wealth, you start borrowing against it instead of selling it and paying for it outright. It just doesn't make any sense at some point to use your own money.

This makes more sense though still there are risks and not everyone wants to deal with them. Another option in this scenario would be to postpone buying the house until the person can simply afford it with their own cash. Of course takes time but creates no risk that you'll end up without your stocks, money, and house.

 

[biophase]

This makes more sense though still there are risks and not everyone wants to deal with them. Another option in this scenario would be to postpone buying the house until the person can simply afford it with their own cash. Of course takes time but creates no risk that you'll end up without your stocks, money, and house.

The main problem with this is that as you save money, the asset you want to buy may be increasing in price. You're savings must keep up with inflation to make this a breakeven. But we know that it doesn't, so you fall behind everyday you save for something. The only way to get ahead of this is to invest it into something.

No risk in today's economy means losing money. Because you are earning and saving for something that is increasing in price while the money you save is decreasing in value. Borrowing now is almost a no brainer.

If you have a steady income, I don't see why you wouldn't get a loan in many cases.

You mentioned getting a loan to purchase a business. One example is the person who purchased my business in 2018. They put 20% down and got an SBA loan for the rest. 4 years later, they are still doing well. Let's just assume they used all the profit to pay off the loan. Since they purchased 3x and they are in year 4, they've made 1x back already. They would not have been able to buy my business without one. Where would they be if they were just saving money the past 4 years? Certainly not in a position now, owning a 7 figure business and making six figures a year.

 

[biophase]

To comment on the RK and GC discussion. RK is absolutely right in that management is the most important part of owing real estate. You have to look at real estate as the same as a business. In a regular business, if you put in a good CEO, the business runs itself, increases revenue and you can step back from the day to day. The CEO in your real estate investment is your property manager.

In hindsight, what I should have done years ago was purchase more properties in the areas where I had a good PM company. I should have leveraged their systems and processes. But instead, I looked at a PM as an expense vs an asset. Now that I understand that, I would look for a good PM first before I purchase in that area. It's like finding a CEO to run your company that you haven't even started yet.

GC seems to be saying that his company is your CEO, and you should just give him money to invest with him.

RK is saying you can't start from scratch and expect to run a 10M company correctly from day one. Just like how we start our own business, it starts small, we get experience and grow. RK wants you to start with a few units and move up to a 200 unit later.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MTF]

The main problem with this is that as you save money, the asset you want to buy may be increasing in price. You're savings must keep up with inflation to make this a breakeven. But we know that it doesn't, so you fall behind everyday you save for something. The only way to get ahead of this is to invest it into something.

No risk in today's economy means losing money. Because you are earning and saving for something that is increasing in price while the money you save is decreasing in value. Borrowing now is almost a no brainer.

If you have a steady income, I don't see why you wouldn't get a loan in many cases.

You mentioned getting a loan to purchase a business. One example is the person who purchased my business in 2018. They put 20% down and got an SBA loan for the rest. 4 years later, they are still doing well. Let's just assume they used all the profit to pay off the loan. Since they purchased 3x and they are in year 4, they've made 1x back already. They would not have been able to buy my business without one. Where would they be if they were just saving money the past 4 years? Certainly not in a position now, owning a 7 figure business and making six figures a year.

Thanks for explaining it so clearly this way.

The way you put it and simplified it for a regular guy to understand, I now see that my knowledge in this is severely limited.

 

[Guest-5ty5s4]

Thanks for explaining it so clearly this way.

The way you put it and simplified it for a regular guy to understand, I now see that my knowledge in this is severely limited.

And leverage can be great! Especially on something that historically goes up, beats inflation, that people need to survive, and that can be financed with fixed interest, non-callable debt for 30 years!

(by non-callable I mean they won't foreclose on you just because the market value of the asset went down, unlike a margin loan. Even business loans have "covenants" oftentimes that make them less favorable.* But a business loan on a profitable biz is an amazing tool)

I just can't stand when GC acts like you must invest with him instead of DIY invest. You are not going to get rich by giving someone else your money to manage for you.

*SBA loans are some of the best tools that exist in the US. But be very careful when signing, read the terms. Covenants are extra provisions in the loan that can really screw you and your business. No, Wells Fargo or another mega bank are not "committed to your success."

 

[ApeRunner]

I hate both. But GC, specially, makes me want to vomit.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Kung Fu Steve]

My first biz was the Karate school. I needed 100k. I didn't even have the 20% down but was able to find an investor. We got a 5-year SBA loan but I was able to pay it off in 6 months. Should I have? I don't remember the details now but I think the interest was fairly high. And after that loan, I was debt-free (besides the lease obligation, of course).

I never would have been able to save 100k to start that business as a 21-year-old punk kid.

A more recent "failure" is that a partner and I invested in a business in the health field... a couple of weeks before covid... We each put in a little over 60k -- and that money just went out the window.

These days 60k doesn't make or break me... but it sure hurt like hell.

Should I have gotten a loan on that? Used the cash for something else? Maybe. Seemed like the right thing to do at the time.

 

[ljean]

Rich Dad Poor Dad was the first entrepreneurship-type book I ever read back in 2000ish. I dont remember it having any actionable information, but it was the general theme that was novel to me. I just gave my 11 yr old son a RK book called "Escape From the Rat Race" from 2005 or so. Its a comic book format that discusses business at a kid-brain level.

 

[Bigguns50]

There are many scenarios where as you start to accumulate wealth, you start borrowing against it instead of selling it and paying for it outright. It just doesn't make any sense at some point to use your own money.

100% agree with this. After starting a biz 16 months ago, I am done spending my own money. I have equity, excellent growth, good credit, cash flow, etc. It only makes sense to borrow to expand or do another business. It's the only logical step to take to increase my wealth.

I think the broad stroke of "debt is bad" or "debt is good" is too simple.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.