If all properties went up by the same amount, then we saw that in the former case, you could have had property worth $200,000 with no debt, and in the latter case, property worth $800,000 with $48,000 debt. We then asked if you were lucky enough to receive a $12,000 windfall (in the example an inheritance), should you use the $12,000 windfall to pay off the $12,000 debt on your one property, or should you leverage the extra $12,000 to buy another three properties (each for $4,000 cash with a further mortgage of $12,000). In the example, we imagined owning a single property bought with $4,000 cash and a $12,000 mortgage. In fact, in the case of vehicles, the loan will obviously have to be repaid in a shorter time span than the expected life of the collateral.įinally, we used a simple example to show the difference between using cash to pay off debt, and using that same cash to buy more real estate. When finance is offered on cars, household appliances, or even businesses, you will never get a 25 year loan. For instance, it is easy to arrange 25 year and even 30 year mortgages on real estate, at interest rates that in the US can be fixed for the entire duration of the loan. Not only are banks keen to lend money secured against real estate (consider the plethora of advertisements offering financing on property, and the dearth of similar advertisements offering financing on antiques, jewels, businesses, phone-cards, stocks and bonds) but banks will also offer finance to buy real estate on much longer terms than the other loans that they do (reluctantly) offer.
Even banks think that real estate is safe!
We saw that banks charge the highest rate on unsecured credit card debt, less on business loans, and least on real estate mortgages. To show that real estate investment was not as risky as other investments, we looked at interest rates charged by banks for various classes of investments. In my previous column, I explained how paying down a mortgage rapidly may be a very safe way of investing, but that it does not allow for as much leverage and therefore potential growth as a strategy of using debt more aggressively.
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