Challenge the Box You're in - Posted by Tony Colella

Posted by Shawn Sisco on March 28, 2011 at 11:29:17:

Non-recourse loans notwithstanding. Placing our good assets at risk in order to increase our income streams is what most investors are doing when they incur debt.

It just seems to me that once an investor really has something to lose (existing income streams) that these decisions become much more weighty.

When we take on SFR’s,multi families, commercial, land-homes and MHP’s we almost always are taking on long term debt, and God only knows what the future holds.If this is truly the only way to achieve one’s goals- and many times it is, then so be it.

I get the sense that many have gotten themselves to the point of taking on long term debts on long term investments BEFORE they have developed short term income generating businesses.

Re-investing your own business profits into more passive investments is entirely different from going all in with borrowed funds on a long-term deal.

Challenge the Box You’re in - Posted by Tony Colella

Posted by Tony Colella on March 26, 2011 at 09:44:02:

There are certainly some divided camps on the issue of debt. All have good, sound reasons for their stands. I think most here know my blue collar approach was intended to be for the smaller investor and now I am refining that approach even more in light of what has happened to the economy.

I post the topic of debt here not to preach the pro or con of its use but rather to create these discussions.

One trap I have seen repeatedly triggered over the years is the idea of falling into one line of thinking, especially if it is based upon the past or worse yet a one time (harsh) event. Let me explain.

About 14 years ago I would not have believed anyone could have convinced me to consider buying much less investing in a mobile home (trailer). I was too busy ?thinking outside the box? of my JOB and was interested in making money as a Real Estate Investor.

After reading Lonnie?s books I realized I was not thinking outside the box of ?Real Estate Investing? just because I was thinking ?outside of my JOB.? When I opened my mind up to the principles taught by Lonnie I could begin to see the value and potential they held for me. None of my friends, family, co-workers or even strangers thought this was a good idea for me and yet I quit that very secure, pension funded, 25 year retirement police career.

I spent 3 years doing nothing but Lonnie deals. Anytime someone mentioned Lease/Option, Subject 2, Landlording (yuck) or anything to do with creative Real Estate Investing I closed my mind, put blinders on and convinced myself that I could not be distracted by these other thoughts and needed to remain focuses on my Lonnie deals.

About year 4 or so I met Scott and we began to challenge each other?s way of thinking. No matter what idea one had the other would punch holes in it until we found that we no longer could. Before long we were creating not only a change in our mindset but a change in our investing and in our lives.

I quickly realized that when I got outside of the JOB box, I landed in Lonnie?s ?wobbly? box. By challenging one another to think outside of that one box, Scott and I were able to create out own plan of investing in mobile homes with land and small mobile home parks. I literally had to reconsider and debunk everything I had assumed up to that point. This was painful and mentally challenging at times but soon it became a passion.

The reason I post these crazy thoughts and suggest ideas outside of today?s norm of ?no debt is the only good debt? is because I believe it is all too easy to fall into yet another ?box? of thinking. We don?t grow when we settle on one philosophy. I believe we need to constantly challenge that line of thinking and it is incumbent upon us to study to prove it right. If it no longer holds up to intense scrutiny then we need to revise our line of thinking. Changing times will require us to view our ?boxes? in light of new challenges but I believe the only way to profit from them is to assume nothing and to be willing to have our ideas challenge but most importantly we must listen to reason and not react emotionally.

The topic of ?Debt? is my latest in a series of posts and one that I think is most relevant but not for the reason many may assume. I have my opinions on debt just as each of you do. If I simply assume those thoughts and do not study to show them approved then I have fallen into a ?box.? I believe if we remain in any box we will be limited and let?s face it, most here who are starting out are looking to get out of some box and seeking discussion and information on how best to do that. If we don?t respectfully challenge each others assumptions we will never grow outside of these boxes.

More often than not I find that my assumptions, my boxes, by comfort and conclusions are wrong for me and usually within 3 years they are completely wrong unless I have challenged them and adjusted them along the way.

If you assume debt is wrong for you at this time then most here would agree but are we allowing you to simply hide in a ?box? or are we truly helping you. Does this mean that debt is the answer? Not necessarily. Each person will have to make their own choice but I believe that those who make the best choices based upon diligent study and contemplation, will be the ones who first reach the goals and dreams they have set for themselves.

Ask yourself if what you are doing right now places you on the path to attaining your goals or are you simply hiding in a box of assumptions or a box filled with painful reaction to hard times. If those boxes have a familiar look for you then argue your case but keep your mind open until you have come to a conclusion that best provides the path to your success.

Tony Colella

Re: Challenge the Box You’re in - Posted by Ryan (NC)

Posted by Ryan (NC) on March 28, 2011 at 07:10:29:

Tony I’ve been thinking on this one a bit since your first post in rebuttal to my thoughts…

Your statement of ?no debt is the only good debt? is not entirely accurate on how I personally feel. It’s more along the lines of ?no LONG TERM debt is the only good debt?.

There are reasons still to use debt to good benefit to jump start the process of acquiring, it’s when you hit a point that you have a decent little egg that you need to start turning part of that “Good Debt” in to realized profits to pay off other “good debt”.

AFTER things start heading the wrong direction is not the time to try this, had I sold part of my portfolio early on when the Market was hot and returned realized profits back into the business I would have been in a much better position to weather the storm I didn’t know was coming.

One of the biggest things related to debt in general that I’ve learned with the economy crashing is that equity over debt is worth NOTHING, it’s an imaginary feel good item. It can be stripped away faster than the “Unsinkable” Titanic went down. Even worse it can at times have to nothing to do with anything the owner has done.

Maybe I’m still in a box that I shouldn’t be in but I have no love for the banks or the powers behind them at this point in time. Will i use short term debt to access property for resale within a reasonable time frame, YUP, will I hold long term mortgages in the future, NOPE. Just my personal feelings toward debt as a whole at this point in time, it may change given time but I truly doubt it.

Best wishes,

Re: Challenge the Box You’re in - Posted by shawn sisco

Posted by shawn sisco on March 26, 2011 at 14:23:00:

Let him pray to Him who whose are wealth and riches;
for there is no trade which has not both poverty and
riches, and neither does poverty come from the trade
nor yet riches, but everything according to one’s
deserving (merit).

Tony, I too have benefited from having holes punched in
my business methods. It is a bit bewildering when
responding to a post with questions, and those
questions are perceived as a put down -thick ego, thin
skin I suppose is the cause. I too have had the good
fortune to have had a business partner to really
dissect and think through the likely consequences of
business choices and the best way to prepare for the
likely consequences. Overall, those were the best
things a partnership had to offer.

As the opening line reminds us there is no business so
good that I can’t ruin, and none so bad that I can’t
prosper in…it all comes down to how I handle it. I
think this forum allows us a great vehicle to improve
each of our businesses.

Re: Challenge the Box You’re in - Posted by Tony Colella

Posted by Tony Colella on March 28, 2011 at 08:15:42:

I can understand and support the decision to use short-term debt to acquire properties in the future and the choice to avoid longer term debt.

Truth be told this what not what your post had indicated and this is what I was trying to stress. This is an example of using a “good debt” as leverage in a down economy to buy better and start again.

You had written, if I recall correctly that you would return to the game without the use of mortgages but I believe that this would be unrealistic. How long would it take to “save” up the cash to buy a property when one is just starting out? Some “good debt” would likely be necessary.

For some time now I have pleading the cause of fewer properties can be more. Should someone just starting out or starting over choose to buy say one property per year and work very, very hard to pay it off quickly then they could snowball the income from that property into the paydown of the next. If someone were to hold say 10 units over the course of say 10-15 years this could be a debt free, manageable size pet portfolio for retirement or simple a modest, truly financially free retirement.

Let’s say that on average you could rent such a property for $500 per month. That would be a monthly income of $5,000 less taxes, insurance and maintenance. Not a huge net income but if one has no debt and were to live off employment or other income during the building years I believe personal debts could be managed or eliminated requiring less for a person to live on.

By adding the landlord friendly repairs we all enjoy the maintenance would be reduced. Vacancies can be better addressed by dollhousing these (fewer) properties up. With only 10 or so to focus on full time in our “retirement stage” we can take better care and dare I say max the cashflow from them which would likely increase the total income from the property well above that $500 per month figure.

Lastly I would make this one point regarding debt. In many cases it is not the debt we have on the individual property. I think if we are honest and look at the property we would see that the greatest expenses are things we could have controlled better and not the debt.

Many people buy before the complete the last project which means the first property is not cashflowing properly and is need of our attention which has been diverted to other properties and acquisitions. This is like building a house of cards with the bent and ugly cards on the bottom.

The debt was not as much a factor for these deals as it was our own lack of attention to each one. I have experienced this in my own portfolio and I am afraid to say that I know others who have done so on a much larger scale.

The debt on each of those properties was well calculated and provided for but if we were not able to turn that property around and manage it as if it was our only property, chances are that property failed to reach its potential, homes were not made marketable and the tenants paid less, move more and did more damage. The debt remained the same but unfortunately so did the property by and large.

Debt is just a tool and as others have pointed out, it is up to us to use it wisely. Have I made mistakes on property purchases, absolutely. Have I been guilty of not providing the focus these properties need… absolutely. Does this mean the debt is the problem with the property, in my case I suggest… absolutely not.

I point no fingers at anyone but myself but from the discussions I am having with people from all over the country I am beginning to see this pattern and its reflection in my own struggling properties.


Re: Challenge the Box You’re in - Posted by Bernd Hanak

Posted by Bernd Hanak on March 26, 2011 at 17:58:59:

The metaphor–thinking outside the box–has become a common phrase of our language. It is liberally used by media talking heads, financial commentators and webinar promoters. The inference is often that common knowledge and even established concepts are invalid and should be replaced with a ?new? insight (a new economy, a new normal, a new reality). More often than not, it seems to me, these advocates are staring at a wall of the box without ever actually stepping outside for an honest appraisal and a realistic evaluation of the past, present, or future. One cannot get a panoramic view by just observing the immediate in front of one?s nose. Who can drive safely by focusing directly in front of the bumper? Even birds learned about that perspective a long time ago. I believe what is usually totally ignored are the indirect and the delayed effects of actions and situations. I have often reprimanded myself for experiencing unnecessary consequences that resulted from being too lackadaisical, too cavalier, or actually ignoring delayed effects of mine or other?s actions or inactions. We all know that a poor lifestyle can produce poor health, sometime in our future; that years of steady decline of the purchasing power of our currency could condemn our dollar to its intrinsic value; that the possibility of a further substantial decline of real estate values is at least in the cards. That black swans, manmade or natural, appear when least expected (Japanese catastrophe). Delayed or indirect consequences should be the focus when thinking ?outside the box?. That also suggests that there is an end to any situation and, by implication, the promise of a new beginning.