Welcome everyone to another edition of
the Selling Greenville podcast I am your
host Stan McCune realtor here in Greenville
South Carolina and you can find all of
my wonderful contact information in the
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go ahead and do that I would really
appreciate it today as we're
recording this it is April Fool's Day
April the 1st we are still here in
quarantine and trying to stay sane my
real estate business is still going
along I'm still showing houses now with
with some precautions obviously some
social distancing precautions but we're
still showing houses we're still listing
houses real estate market has
proven to be considered an essential one
here in South Carolina so that's great
there are some parts of the US where
real estate has basically shut down that
has not happened here in Greenville and
we are very happy about that if you need
a realtor if you have questions about
the real estate market I am more than
happy to assist you now today we're
going to be talking about debt not death
but debt good debt and bad debt and
let me just start with a quick
disclaimer here I need to do this I am
not a financial adviser so this is a
real estate podcast and I am a realtor
I do not know your financial
situation and I am not giving you any
Financial advice that's not what I do
if you would like to talk to a financial
adviser I know a few people I'd be happy
to to recommend you to reach out to one
of them but this is a real estate
podcast so just keep that in mind as
we're talking about finances and debt
I need to
discuss your real estate situation with
you and if you have someone that you
want to discuss your financial situation
with there are people that are
professionals at that without further
Ado let's get right into the meat of
this podcast good debt and bad debt now
you might be one of the people and I
respect the people that are like this
you might be the type of person that
doesn't really believe in good debt
that could be for a variety of reasons
you might have religious reasons for
that you may have read a book that
encouraged you not to get into debt you
may have had a parent or a relative that
had their lives messed up by bad debt
and I just want you to I want to ask
you to keep an open mind to understand
that there are a lot of other
perspectives out there in fact some of
those authors that have written books on
how debt is really bad if you look at
what they have
done over the course of their lives they
typically don't practice what they
preach which is kind of ironic they
typically are the types of of people
that do take on debt but they understand
that there is good debt and there is bad
debt they understand that a lot of
people simply refuse
to to parse between those two things
in their lives and so it's a lot simpler
to tell someone don't get into debt than
to try to have this type of nuance
discussion which is like okay there is
actually good debt but you have to do
some work to identify
it so what is good debt and what is
bad debt I'm sure you have an opinion to
an
extent and and I'm sure you know a
few things like for instance obviously
it's better if any debt that you get
into if any loans that you get if they
are lower interest lower interest loans
are better than higher interest loans
that just goes without saying it's
better if the loan or whatever debt
you have doesn't really hurt your credit
and there
are forms of debt that hurt your credit
more than others for instance $100,000
of credit card debt that's gonna hurtt
you a whole lot more in terms of your
credit score than a $100,000 mortgage
will and the simplest reason for that is
the $100,000 mortgage is has collateral
what we call it's it's backed by
something it's backed it's guaranteed by
a house and odds are your house is going
to be an appreciating asset whereas
credit card debt isn't backed by
anything it's guaranteed by you alone
and it's probably not backed by anything
you probably spend it on a on a
hodgepodge of things that aren't worth a
whole lot now and we're going to get
into that in a minute but you
obviously most people understand the
difference that that Mortgage Debt looks
better to the Credit Agencies than a
bunch of credit card debt and and also
this kind of Segways into another very
basic thing it's usually better to have
debt on tangible items than on
intangible items like Vacations or
entertainment not that there's no value
to vacations or entertainment but those
things those things are gone they
don't help you in terms of building your
wealth in in terms of they they might
improve your quality of life to some
extent but it's it's not very measurable
and so it's better to go into debt over
something that is tangible versus
something that is intangible we we
already know this like almost everyone
listening to this podcast if not
everyone already know is that so let's
just get that out of the way and get
into the meat of this what are some of
the as we go beneath the surface what
are some of the more nuanced things that
differentiate good debt from bad debt
all right here is what I what my opinion
is again I'm not a financial planner or
adviser but here's my opinion on the
differentiation between good debt and
bad
debt good debt is on an asset as we've
already discussed that you need or
someone else needs and that helps to pay
for itself in some
ways it is an asset that you need or
that someone else needs and it helps to
pay for itself either directly or
indirectly sometimes it's simplest to
think about it from the standpoint of of
well what's something that doesn't do
that before we we explain something that
does do that so what would be like a bad
example of this bad debt debt that isn't
on an asset that you need or someone
else needs and that doesn't help to pay
for itself well probably one of the more
common examples would be Hobbies most
Hobbies do not pay for themselves most
of them you you are having to pay out of
your own pocket the thing itself doesn't
have intrinsic value it has more value
to you than it does to another person
the value a lot of that value is
sentimental and so it doesn't help to
pay for itself in any way you accumulate
the Whatever item it may be like one of
my hobbies is I like board games so I
accumulate board games those games don't
have a whole lot of value now there
might be some ways to to get games
that do have value or there might be a
way to collect games in a way that is
valuable
there there are ways that Hobbies can
have some value but more often than not
they don't and so it's bad it's not bad
to buy those things but it's bad to go
into debt over those things because that
debt has to be paid by someone and it's
going to be paid by you and you're going
to be paying every month for something
that doesn't doesn't have a whole lot
of value outside of of some value that
has for you
specifically and so that's that's a
riskier thing to be paying for
another one to to consider is school
debt now school debt again I have to
be careful with what I say here but my
personal opinion is that some school
debt is better than others I I think
that I would be okay with someone going
into school debt if that debt a isn't a
ton of debt you know that's a major
consideration like $20,000 of school
debt is a lot different than
$120,000 of school debt so that's a
consideration but also a major
consideration is is there a direct path
to a career or to money in some way as a
result of this school debt that I'm
going into again it needs to help to pay
for itself so you know like again a
negative
example I I would think long and hard
before getting a degree in Psychology
and I love psychology I was a minor in
Psychology so I'm I'm not trying to
trash people that are studying
psychology but there's not a clear
career path in a psychology it's very
competitive to become a
psychologist to to make money in that
career and again I know a little bit
about this because I was a minor in it a
lot of people that study psychology end
up just becoming psychology teachers
or you know they might just become
teachers in high school or they teach an
occasional psychology class or something
like that but that's going into
school debt over a Psychology major that
unless you have some type of of way to
kind of guarantee that there's going to
be a career or a money a way to make
money coming out of that that's that's a
a risky thing to go into debt over now
there are a lot of careers out there
where there are shortages you can you
can do all kinds of statistical
Research into this and see oh well
there's a a shortage for instance
there are in a lot of places in the US
plumber
shortages I would be pretty okay with
going into school debt and and also it
tends to be cheaper because you go to a
trade school it doesn't cost a whole
lot to learn how to become a plumber
that's that is again the a consider
that you're probably more likely to be
able to have a career right away
coming straight out of Plumbing school
or whatever you know trade school where
you you learn how to to do the job of
Plumbing there there are going to be
more options for you
available but this is a real estate
podcast right so at the end of the day
real
estate
property houses these are things things
that people do need and so it checks off
that box and they are things houses by
and large do end up paying for
themselves and obviously investment
properties you want to make sure your
investment property pays for itself if
you're buying a duplex that's like
$400,000 and all you can rent it out for
is like you know
$2,500 total
that's th those numbers don't work
very well don't don't buy that duplex
please please don't buy it I I bought a
quadruplex a few years ago
$158,000 and it typically rents over
$4,000 a month you do not want to spend
$400,000 on a duplex that is only
bringing you in 2500 a month those
numbers are are not good so not even all
of real estate would in my opinion fit
into the the good debt
category you need to make sure that
it does in some way pay for itself part
of this is buying within your means and
your primary residence pays for itself
in an indirect way because you have to
have a place to live right and you're
going to have to be paying someone to
live somewhere odds are odds are that
you'll have to pay someone to live
somewhere well what's great about real
estate is that if if you keep up with it
if you keep it in good condition it
appreciates and value and there's a lot
of reasons for that but the simplest
reason is that the population of the
world keeps going up so there's more
people being born more people becoming
adults every single day and those people
need places to live and so simple
economics supply and demand mean that
homes go up in value and there are other
factors that I could get into but but
that's the simplest version of of why
real estate appreciates and value it's
supply and demand there is increasing
demand but we only have we we have a
limited amount of supply of real estate
in this world if you own an acre of land
I've got really good news for you and
that's that we know how many acres of
land are in the world now you know I'm
not accounting for climate change or
anything like that so some people
might say well you know receding sea
levels we may have more land I'm not
getting into all that stop that
the bottom line is that the asset
itself it needs to be able to pay for
itself and one way that it can is that
it can go up in value and so the
value is is
increasing but
your what you owe on the property is
decreasing as you pay it down and so if
you really make wise decisions you will
actually end up in a situation where the
appreciation of the property will
actually exceed the mortgage payments
there or or at least the interest that
you end up paying on the property so
let's say that you buy a property for
for $200,000 and I'm just spitballing
math out there let's say that you end up
paying you know
$50,000 in interest over the course of
of however many years that you that you
owe money on that you have a mortgage on
the home you only have to sell that home
for 250,000 to get that interest back
and odds are in a few years at at
current levels of appreciation you'll be
able to do that very thing you'll be
able to sell it for at least
250,000 and so that is an example of
good debt you're going into debt for an
investment profit property that is that
the rent is paying for itself or the
investment property is paying for itself
in some way your primary residence it's
appreciating in
value now what's not good is if you end
up not taking care of of that
property and this is kind of Segways
into my next point you always want the
the asset in in a good debt situation
the asset that the debt is on you always
want it to be worth more than what you
owe on the asset right and so in real
estate because of the principle of
appreciation that typically happens but
there is an example in which it doesn't
and that is if the property falls into
disrepair there are some other examples
as well if if you if you end up you
know overpaying for something so some
people will get in trouble with this for
land they will pay too much for land
that doesn't have a whole lot of value
again the reason why it doesn't have a
whole lot of value goes back to what our
last point that not a whole lot of
people need it for one reason or another
there's some land that is undevelopable
there's some land that people just don't
need there's not a whole lot that can be
done with it and so that can be
something that is easier to end up in a
situation where you owe money on this
land and the land isn't worth what you
owe on it and that's really bad what
happens if you if you need if you need
money real
quick you go to sell that land you find
out if I sell this I'm going to owe the
bank several thousand do after I sell
and I'm not going to have anything left
over like that's a worst case
scenario and so you don't want to
have that type of debt that is bad debt
and particularly this is where people
get into trouble with credit cards right
CU they end up racking up credit card
debt on a bunch of things things that
immediately lose value you buy a bunch
of clothes that you wear for a little
bit or even that you don't wear they
immediately lose value go try to consign
those clothes go try to sell them on
eBay you're not going to get anything
close to what you paid for those clothes
you're just not and you know you get
these people on Craigslist and Facebook
Marketplace that think that they can
sell their half-worn Nike sneakers
for you know for $60 and it's like no
that's that's not how this works and so
you don't want to have a bunch of
debt on a bunch of things like that and
on real estate the same principle
applies make sure that the asset that
you're purchasing that it appreciates in
value and there are ways that you can
analyze real estate to ensure that it's
that it's in an area that is going to
continue to appreciate
well it all real estate that is kept up
with should appreciate but it if you buy
a property that's in a rough area and
the and the property is not in good
condition and you don't do anything to
it you might end up with real estate
that depreciates in value that is not
out of the question sometimes economic
things can happen that cause
depreciation now you can't you can't
control that and and again I'm not not
saying depreciation from a tax and
accounting standpoint I'm saying it
actually depreciates in value you bought
it for 200,000 and after a few years
it's worth
180,000 that can happen you can't
control for that and you know
obviously there's a certain amount of
risk there but you look at the economy
overall within time real estate always
appreciates in value that is a general
constant for the average property you
just need to make sure that you make a
good decision when you buy that property
and you just need to make sure that you
keep up with it that you don't let it go
into
disrepair and that Segways into yet
another Point here on good debt versus
bad debt you want to make sure in in a
good debt situation you're not biting
off more than you can chew you are in a
situation where you can go several
months of no income and still be able to
afford what you're you're paying for
what the item that you have debt you can
still afford to make those payments you
won't go into foreclosure right away you
won't lose the item right away you that
is
better than the
alternative and that's a really
important thing as well by the way I
want to mention real quick I'm not
suggesting in all of this that you only
want to have debt on appre appreciating
assets I I should have mentioned this
earlier when we talked about something
that helps pay for itself a car is a
depreciating asset but it helps to pay
for itself there's a difference between
buying a car that helps you work every
day and buying a third car that's going
to sit in the garage and that's more of
a hobby type of vehicle you know that
that
1965 Corvette that you just love to
drive on the weekends but you can't
really afford it and if the economy
crashed and you had to go for several
months without any income you wouldn't
be able to afford that that is not good
debt like that's a luxury
item in in every sense of the word
that is that is bad debt and so keep
that in mind and there are real estate
options that are that can be bad debt in
the same way you want to make sure that
you're not biting off more than you can
chew don't there to be honest there
are banks that that will sometimes lend
you more money than they should and the
risky
lending programs that were out there
in in 2006 2007 it it's gotten a little
bit
better but you still can find
yourself making taking risks that you
shouldn't take don't do that make sure
that you have adequate cash Reserve
that you're putting yourself in an
adequate financial situation that you're
buying the the investment property that
is not going to just completely deplete
you of all your cash reserves you need
to keep that into
consideration that's a a very important
consideration in all of this and and
even though that isn't
necessarily something that we can
look at the debt itself to identify if
it's good or bad that depends on your
personal
situation and again sometimes it's a
good idea to to discuss this with a
financial advisor as well last but
not least and and this is something a
lot of people don't consider but we
alluded to it earlier some debt actually
makes you more lendable in some ways and
and that's good debt and some debt which
I would say is bad debt makes you a more
risky borrower in the eyes of the bank
so the example we gave earlier $100,000
in credit card debt versus $100,000
mortgage Banks do not want to see for
the average person $100,000 in credit
card debt but if they see a $100,000
mortgage that you've been paying
frequently and that's on a house that is
appreciating in value and you've kept
up with that house and and all of that
that looks really good on your personal
financial statement
and so that will open up new avenues
more banks will be willing to lend to
you and and you'll find yourself having
the ability to to buy some some
investment properties potentially if you
want to and I highly recommend that I am
of the opinion every single person
should have rental properties in their
portfolio I'm I'm not going to speak
to other Investments because that's not
my specialty but rental properties I
think because you everyone always need a
house right we can't guarantee that
anyone will ever need you know Amazon
right now Amazon it from what I can see
looks like pretty much everyone needs it
and and if you bought stock in Amazon 15
years ago you're probably really really
happy but we don't know if Amazon's
still going to be here in five years
you know they're all kinds of companies
tech companies that go under every year
someone's always going to need a house
and as we already said the population
keeps going up that's going to
continue we there is no reason to
believe that we aren't going to continue
the the human population exponential
growth
Trend if we don't then that's really bad
like you know I believe I saw a chart
that the last time the human population
actually dipped was during the Bubonic
plague and and so we obviously are
hoping that that's not happening right
now we don't want that to
happen and I don't see any indication
that that that will happen from you
know from what I see and so it seems
like real estate will continue to
appreciate and
value bring that all
back getting a
mortgage helps you to become more
lendable then as you acquire rental
properties or investment proper
properties you get mortgages on those
those actually Banks look at those and
obviously they're they're going to
consider your debt to income as well so
you could run into a situation where you
own too much property and have too
much debt com relative to your income
but usually there's a bank out there
that's like you know what we'll give you
money You' you've shown that you're
dependable and we'll give you money and
obviously let's go back to what we said
before make sure that you have the cash
reserves and the ability to to float
whatever additional debt you take on
but in the end it will help you long
term if the debt that you take on is
debt that makes you more appealing to
Banks rather than less appealing it's
helpful it's helpful if you can get
money from a bank particularly if you're
using that money in long-term ways
rather than just using it to you know
buy that Tommy hillfigure shirt that
you've been waiting for again that's bad
debt don't do that we want to stay with
good debt assets that you need that
someone else need that helps to pay for
itself assets that are worth more than
what's owed on on it or on them
assets that you can afford things you
can afford if several months go by
without you making any income and and
assets that help you to to be more
attractive to a bank that helps you to
be more lend
so these are the things that in my
opinion differentiate good debt from bad
debt I do think I do see a
difference because at the end of the day
if if you can try to to live your life
with with no debt but you're paying
someone you you are paying to have no
debt and is there a virtue in saying
well I have no debt but I'm having to
lease my house and it's it's not the
house that I want and my landlord you
know won't do all the repairs that I
want in my opinion now you know
granted I'm an American and this is the
American dream I like owning a house I
like being able to do to it whatever I
want I like the buck to stop with me
this is my decision this is my castle
and I can't be kicked out whenever
the landlord decides that he wants to
kick me out or he ends up selling the
property
that there is some security in that and
I feel like the security there that
that is helpful and that that outweighs
the the the downsides of the
debt the house that I live in I've made
sure that when we acquired it that it
it contributed towards our overall goals
our overall financial goals that we had
that ensured that the debt that we were
taking on with the house that we when we
acquired it that it helped us to
achieve our financial goals and so it
wasn't a bad debt situation now if I had
decided you know what I want to buy a
really Niche house a house that has a
50s style Diner
kitchen now we're starting to get
into a bad debt situation right because
that might be an item that you're paying
a premiOn and nobody else wants that
or you know there there are a handful of
people that probably want that but
when you're limiting the pool of people
that need something and and again I'm
kind of backtracking a little bit I
probably should have said this with
my earlier points but you want to make
sure you want to have the widest appeal
possible the best debt has the widest
appeal possible the widest Market that
needs it it's better to have a house
that you know that if it went on the
market a thousand people would want it
versus a house that if it went on the
market only maybe two people would want
it and so those are the things that
you're considering when you're looking
at real estate there is a good debt
scenario versus a bad debt
scenario and there's a lot more to
consider I I don't want to this podcast
to drag out any longer but I'd love to
talk to you about it so again my contact
information is in the show notes feel
free to reach out to me we can talk
about this if you have a specific
property you want to run by me I am
always happy to give my opinion my
professional real estate opinion
obviously it has to be here in in
Greenville because I Don't Give opinions
on properties in New York and Maine and
Texas I have no idea what those markets
are like but I sure do know what this
Market is like and if you need a realtor
you know someone that needs a realtor
please reach out to me and on this
April Fool's Day please don't pull any
pranks stay sane during the quarantine
and we'll talk next time
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