Even Mortgage Lenders Are Repeating Their 2006 Mistakes

Even Mortgage Lenders Are Repeating Their 2006 Mistakes | Zero Hedge


Re-posted from Zero Hedge.


Geoff Comments: Even businesses that should know better have difficulty learning lessons they should have learned… Are we destined to keep tripping up until we actually learn the lesson?

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2 Responses to Even Mortgage Lenders Are Repeating Their 2006 Mistakes

  1. V says:

    The issue is that a large swath of the U.S. population lives beyond its true means. That mindset has crept into businesses, too. To me when the cost of money actually has a meaningful costs (e.g., higher interest rates), that people were actually far more careful with their money. People would actually save, invest, even become entrepreneurial. All of that has eroded.

    As a business operator I’ve found a way to operate it on the land that I own. We started with no debt, and we grew the business organically without outside monies. The fact is, certain (but not all) businesses can be self-capitalized, and such businesses are much stronger than others that have debt financing beneath them.

    Also, true, is that certain businesses are best operated within a certain size range. Put another way, there is truth in the saying that many businesses aren’t meant to grow beyond a certain size lest they become less effectively managed.

  2. V says:

    Another lesson is that while there is appeal to investing in tax-deferred retirement savings plans, there is equal appeal in investments that reduce taxes in real-time. Owning an operating a business offers considerable shelter from taxes and income, especially when maintaining flexibility to move money around. As simple an example is having a business vehicle. Some people have a hobby that they turn into a business.

    Real estate is a tremendous vehicle for leverage though it should be done to minimize risk. If purchased at the right time you earn equity starting very soon after the purchase, and capturing that equity through appreciation. Ideally you buy and build enough equity to protect you in a falling market. Rent out a property and you have income. If you have been fortunate enough to put enough money down then the property cashflows. So rental income has to exceed the property’s monthly expense by enough to create meaningful gains. Tenants paying down your mortgage steadily each month adds to your equity capture. The owner can reduce earned income tax on cash flow by taking a depreciation deduction against the rental property. The capital gains tax went up just a few years ago to 20%. Use a 1031 Tax exchange to sell your current property but you have to buy one or more replacement properties whose value equalled or exceeded the sales price of the property you sold. You’re stepping up the cost basis of the property but in essence deferring the taxes because of the approximately like valued exchange. Also, if you pass the property to your children, they will take over at the new cost basis (must be after your passing), which wipes out all of the capital gains over the life of that asset. This is how generational wealth is passed on with minimal impact from taxes.

    There is no get-rich quick investment, and there are rare exceptions. There are get-rich investments but they do take time. But in just a few short years you can feel the progress of getting richer.

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