It’s time for Ask The Guys … the episode where you ask and we answer!
People are facing perilous times and wondering what to do to prepare.
Today, we’re tackling questions about tapping equity while it’s still there, getting liquid just in case, and dealing with debt decisions in an uncertain economy … and MORE!
This edition is all about making smart moves in a crazy world.
But remember … we offer commentary, education, and resources … not advice.
Always consult with tax or legal professionals before making any investment decisions.
In this episode of The Real Estate Guys™ show, hear from:
- Your equitable host, Robert Helms
- His indebted co-host, Russell Gray
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What is up with debt?
Our first question comes from Tim in Grand Haven, Michigan. He is currently learning all he can to switch from investing companies to investing in rental properties.
But … Tim wants to know, what is up with debt? “I keep hearing and reading how it can be used for good,” he says.
How can the upside of debt outweigh the downside of the risk that it brings?
This is a great question because it is a fundamental principle of real estate investing. One of real estate’s great benefits is leverage … the fact that we can use debts.
First, there’s nothing wrong with being debt-averse. When you are talking about consumer debt … paying interest out of the sweat of your own back … then, yes, you don’t want to be in debt.
You only want to be in debt when there’s a positive arbitrage … meaning that you are going to make money on the borrowed money.
The reason this is so important today is that we’re in an inflationary environment … where inflation is the cause of your equity growth on your property, and you aren’t REALLY making progress.
The only way to make progress is to grow faster than inflation. Debt allows you to do that.
The last reason to use debt is when you have equity in the property … it’s exposed to predators and creditors, and there’s no way to shelter or hide it. Debt can actually help with asset protection.
We will point out to Tim … and to all of you … that interest rates are at record lows, so your borrowing power is incredible right now. That’s another reason to consider debt.
To be clear, we’re not here to talk you into going into debt. We know that people that invest in real estate with cash, and they do just fine.
But, leverage can magnify returns.
Where to go for equity
Kenny from Indio, California, wants to know if it’s better to do a takeout cash loan from his home or from a rental property. He has equity in both.
If you have a lot of equity in the home you live in and you have a lot of equity in your rental home, you could go with either.
But, there are strategic reasons why one or the other makes sense for your situation.
It’s going to be cheaper to get equity out of your home … it’s not better so much in terms of cost but in terms of risk.
When you put more debt in your home, you’re taking a risk … one that is going to be predicated on what you do with the proceeds.
If you invest the proceeds into something that will provide enough cash flow to cover the cost of acquisition and make a profit, it might make some sense.
We are personally big fans of converting equity into precious metals … but whatever you choose to do, you want to be more conservative with whatever you do in respect to your own home.
For the rental property, you won’t be able to get as high a loan to value … meaning you won’t have access to as much of the equity. It’s going to cost you a little bit more.
Like your own home, the risk depends on what you’re doing with the loan proceeds.
Ultimately, you just need to take a look at the cost of pulling out equity, what you’re going to do with the money, and how secure you are in the rest of your portfolio, balance sheet, and cash flow.
Getting liquid
Randy in Reinholds, Pennsylvania, has been hearing a lot about getting liquid by tapping equity, credit lines, or selling marginal assets.
But, he wants to know how to balance the need for cash versus the likelihood of a falling dollar eroding your cash purchasing power. And he is wondering what other liquid assets … besides precious metals … where we would look to park dollars.
There’s an old saying that the bank will never loan you money when you need it … but when you don’t need it, they are willing to loan you a ton.
It often does work that way.
If we’re sailing into headwinds, we want to have some cash. But if we know that the value of every dollar in our wallet is going down steadily over time … like it has been for over a hundred years, then we don’t want to hang on to too many dollars.
Our good friend Robert Kiyosaki says, “Cash is trash.”
It’s not that he doesn’t LIKE the things money will do for him. It’s that when you HOLD your money in liquid cash form, it virtually goes down in value all the time.
Precious metals can be a great place to hedge up some of your wealth. But remember … metals don’t really change their value.
When you see the price of gold go up … it means the value of the dollar has gone down.
There are reasons to have cash where you won’t lose all the value as the dollar continues to erode … like real estate.
If you’re aggregating cash in anticipation of real estate prices falling, then really, in terms of your purchasing power, your dollar is going up in value.
We also like to have both cash in the bank and out of the bank. Keeping your cash in the bank under the $250,000 limit will also protect you during a crisis.
Another relatively liquid asset to park dollars is an apartment building … because every month an apartment building converts that month into dollars.
And guess what? As the dollar erodes, the value of rent goes up … giving you more cash flow.
The demand for apartment buildings … more than single-family homes, more than almost any real estate … has been so strong that if you were willing to list it at anywhere near market, you could get a fast sale.
More Ask The Guys
Listen to the full episode for more questions and answers.
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