The headline of this post is correct. It’s not a typo and you didn’t misread it. I don’t want to be mortgage free (yet). Am I obsessed with debts? Somewhat. Let’s just say that I don’t hate debt nor do I fear it. I am just using debt responsibly as a wealth building tool. In fact, for the majority of my assets, I used debt to acquire them.
Good Debt Vs Bad Debt
Some people either hate debts, or don’t understand the different types of debts or can never get out of debts. Well, not all debts are bad and not all debts are created equal. There are good debts and there are bad debts. Let me clarify what I meant by that. Any high-interest bearing debts (credit card or payday loan) or consumer debts that are used to buy depreciating assets (personal or recreation vehicles) are bad debts. Any low interest bearing loans (mortgage or secured line of credit) that are used to purchase appreciating assets are good debts.
My Debt History
If you have been reading my blog, you pretty much know that I started my adulthood with $30,000 of student loan debt after obtaining my university degree. Many personal finance experts tout that student loan debts are good debts because you’re investing in yourself and the interest that you paid is tax deductible. I somewhat agree with the statement, but it’s only true to a certain extent.
For me, I don’t consider a student loan a good debt or a bad debt. I consider it a necessary debt that I incurred in order to prepare myself for the real world. Even though I get to use the interest payments to lower my income tax, it still costs me money and I have to repay the entire loan no matter what.
It took me a couple of years to fully repay my student loan and I learned two valuable lessons from it. The first lesson is that there are two sides to debt. It can either cost you money or help you make money. The second lesson is that the interest cost on loans that you incurred for the purpose of earning an income, you get to use it to lower your personal income tax. It means that if you use debt responsibly, it can do wonders for your personal finance.
The Plain Vanilla Mortgage Debt
After paying off my student loan, I started to save diligently with my girlfriend (who is now my wife) for a down payment on a starter home. This was the first time I learned how to use leverage to buy appreciating assets. Once again, many personal finance experts believe that mortgage debts are good debts because I am borrowing to purchase an appreciating asset and saving money by not paying rent. I also don’t fully agree with the statement as I don’t think that it’s totally a good debt. If I can only find a way to truly make my mortgage a good debt.
The Smith Maneuver
Having owned my home for a couple of years, I built up a bit of equity and the value of my home increased more than 20%, I was looking for ways to have my money working harder for me. After reading up on a few personal finance articles, I discovered The Smith Maneuver. This is a strategy that enables the homeowner to borrow the equity in his/her home and use the money to invest. The income earned from the investing activities will be taxed, but the interest costs can also be used to lower one’s tax bill too.
During 2008, I executed my first Smith Maneuver, borrowed $50,000 against my principal home and I invested it in the stock market. The timing wasn’t great and I almost lost all my money during one of the worst financial crisis in modern history. Fortunately, the downturn did not last very long and stock market made its slow and steady recovery after March of 2009. My investment also followed a similar trajectory and recovered along with the stock market.
Great Investment Opportunities
A few years after the financial crisis, mortgage interest rates were still at rock bottom, home prices continued to increase and the equity in my home continued to build up. I saw another opportunity to invest so I refinanced my mortgage once again and took out another $100,000 in investment loan. For this investment, I partnered up with my buddy and we purchased our first investment property.
For this last six years, I had used the inflated housing market, low-interest rates, equity in my home and my mortgage to my advantage to purchase a total of five properties. I also sold three properties as those properties either did not fit my investment strategy or my lifestyle needs. I am currently left with three properties. One with a great backyard where I live and grow my own food. The other two properties are my long-term investment properties that I manage with a partner/buddy. These opportunities only existed because I was able to use my home/mortgage to borrow money to invest.
More Borrowing
My borrowing did not stop with the refinancing of my mortgages. I also borrowed money from risk-adverse family members to invest. I paid them more than three times the rate of saving accounts, but still low enough for me to be a cost effective investment. I only needed to pay the interest portion of the loan. With this arrangement, both parties benefited. I was getting a flexible and low-interest rate loan and my lender got better returns for their money. Win-win.
My Current Debt Level
As of my last net worth performance review in June, I had a total of about $900,000 in mortgage/investment debts. This number did not include the mortgages for my investment properties as I only used the investment capital as part of my net worth calculation. Only about $185,000 of the $900,000 of my total debts was my personal mortgage, where I can’t deduct the interest cost, but the rest I can because I used for investments.
The Results
Ten years ago, I had one asset (my first home), which was worth less than $285,000, a $225,000 mortgage and a net worth of close to $0. After ten years and a few financial maneuvers, my assets increased to about $2.1M with $900,000 in mortgage/investment debts. Along the way, I saved an extra $200,000 because I borrowed more money to invest. I also have a $500,000 stock portfolio that earned a sufficient amount of dividends to cover the interest payments on my loans. I get a free shot at capital appreciation from that stock portfolio.
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My Two Cents
Debt is a double-edged sword. It can either help you build wealth or destroy your life. If you use it responsibly and for the purpose to earn more income, over time, you disciplined behaviour will lead to great financial results. If you use it recklessly and only for consumption, it can cost you a fortune as you will be working just to service your debts.
So, what’s your view on debt? Do you consider debt a wealth building tool? Would you rather strive to be mortgage free or leverage your home and try to increase your wealth?
About Leo
I have no regrets of being 100% debt-free! 🙂
We both saved (invested) aggressively and also made huge extra payments toward our mortgage. Then when the point came that our investment accounts would allow us to retire early, we also had enough equity built-up so that we could downsize and pay cash for a smaller place. I think both options (save/invest vs pay off debt) should be combined and balanced.
Nice leo. Quite a bit of assets. I used to be all about paying off the mortgage. As you know i refinanced and wish i did it sooner!
debt can be good thing. It can work to your advantage when its all about positive cash-flow,especially if you are in a walk away position with 100% leverage.Been there,done that
Debt is not a bad thing if you know how to leverage it, which you certainly seem to know how to do. After amassing over a million-dollar net worth in a decade, do you have plans on reallocating some of that money? I’m looking to pay down or pay off my mortgage while the markets are at high valuations. I’m still 100% in the market but at some point I may shift to focus on my mortgage.
Good job, Leo!
I agree with your approach and I wholeheartedly believe in the good debt/bad debt paradigm. But I prefer the more strict definition used by Robert Kiyosaki that defines good debt as one that is used to generate positive cash flow that exceeds the cost of the debt, in other words, the cash flow generated (from whatever source) pays for the cost of the debt.
This is different than simply considering debt as good to purchase an “asset”. The risk with this is that asset valuation is much more subject to market conditions. Asset appreciation is not sufficient as it can also depreciate; then you have a losing situation. Whereas if you have stable dependable cash flow, whether the underlying asset depreciates or not, you are able to maintain your position and have lower risk exposure. This is why borrowing money to invest in say the stock market is not the most financially wise decision unless the structure of the investment can pay for the cost of borrowing. Not to say it cannot be rewarding; it is just that the risk has to be well understood.
Of course, the key is making sure the risk for any investment is assessed and managed well. And of course, leverage is a great tool if used wisely, but it can cut both ways. So it is very important to understand how leverage works in both directions.
Any way, good write-up.
I personally am not a fan of debt at all. I understand that it’s easy to leverage debt into more assets but personally for me I don’t sleep well doing so. So I while I know it makes sense it certain situations I’ve passed on taking on more debt.
I have been thinking about using the Smith Maneuvre but am still a bit uncomfortable with it given the rising interest rate environment. Good for you for being comfortable with leverage, it has worked out really well for you! My dad is the same, he is leveraged a lot, he remortgages and buys more real estate with his mortgage debt.
Debt is indeed a double edged sword. I respect that you use debt to work for you and it sounds like it worked out great. I think that if you are responsible and have cash reserves to weather the downturns more power to you. I do however get nervous for new investors that hear these stories and with limited knowledge dive in and get caught with their hand in the cookie jar when the next correction inevitably comes.
Full disclosure the only debt I have is a mortgage with a payment that is easily covered with our income. I like to pay down a bit of this extra in sync with my other investments as my “bond” position of my portfolio. I would like to get into real estate investing but refuse to be a long distance land lord. I have a feeling the opportunity will come for a multi-family down the road that I will pull the trigger on.
Thanks,
Damn Millennial
I think you and I have a very similar mentality when it comes to “good” debt vs bad debt. A lot of my friends, family and coworkers think I’m crazy when I talk about borrowing at low rates to invest. But I can understand why… no one likes debt.
I’m sure both you and I don’t like it either, but it doesn’t bother us to the point where you can’t sleep at night. Like you, I personally see it as a wealth building tool as long as you use it responsibly and know how much of it you can handle!
Another thing I like to mention is if you’re relatively young, time is one of your greatest assets, so you can withstand a lot more risks compared to someone who is older.
After reading this, I feel like I can connect with someone (in Toronto) when it comes to leveraging responsibly lol.
Anyway, this was a great read and I enjoyed it very much! 😊
@Panda, I don’t think that borrowing to invest is a crazy thing to do. It’s actually the smart thing to do for people that have the discipline to manage their money. Don’t pay attention to those pessimists. The important thing to do is to set your own financial goals and path. You are the captain of your ship and only you can motivate yourself to achieve your goals.
If you ever want to have a meetup in downtown Toronto, let me know. I am always happy to meet with like-minded people.