The Reason I’m $1.8 Million In Debt

What's up you guys? It's Graham here. So, I really feel like this is something worth addressing given just how much misinformation there's been surrounding a few of the recent videos that I made. Two of which really stand out the most. The first one is when I took out a 41 thousand dollar loan to buy a Tesla Model 3, and the second one, I took out a six hundred and seventy-five thousand dollar mortgage against a property I own here in Los Angeles.

Although, to be honest, that's not the entire picture because there's also another seven hundred thousand dollar loan I have against another duplex that I own in the area and also a three hundred and ninety-two thousand dollar loan that I have against another home I have.

If you guys are adding all of this up as you go along, you'll see that I have about 1.8 million dollars worth of debt to my name. Now, while some of you might understand the nuances of this and grasp the bigger picture, it's become very evident that most people do not. Instead, they just focus on one single word, and that is debt.

To me, this isn't totally surprising because we live in a culture that both glorifies and vilifies the act of borrowing money. On the one hand, if there's something you want but you can't afford it, it doesn't matter because you can finance it. Like that Hawaiian vacation you've always wanted to go on; it doesn't matter if you can't afford the ten thousand dollar price tag when you can just pay one hundred ninety-three dollars per month for 10 years instead.

Like those Gucci shoes that you like and really want to buy, who has seven hundred and ninety dollars when you can just pay fifteen dollars per month for twenty-two months? After a while, it becomes very easy just to get desensitized to the price tag of an item because as long as you could just afford to make the monthly payment, you can get the instant gratification of buying pretty much whatever you want that was just previously out of reach.

And it’ll care, right? Like you should live while you can and always just figure it out later. But with that comes some very scary consequences. Consumer debt recently reached an all-time high of four trillion dollars, from that one trillion dollars is charged to a credit card. And to top all of this off, as the cherry on top of the debt ice-cream sundae, is that nearly 70 percent of college students graduate with nearly $30,000 in student loans debt.

Like, this is very much a cancer and a drug. It's the access to quick immediate money combined with instant gratification that could be wildly addicting. People could very quickly and easily find themselves in more debt than they know what to do with. And no matter how hard they work to pull themselves out of that hole, they're constantly pulled back by cripplingly high interest charges each and every month.

So how do we solve this, and what's the solution? Well, most people believe it's by practicing this one simple rule when it comes to managing your money, and that is debt is bad, avoid it always. Anytime I hear this, I shake my head in disagreement because that's like saying water is bad because you can drown in it or that electricity is bad because it can electrocute you.

Debt is absolutely no different than this. It can destroy your life and ruin it if you're reckless, or it can make you wildly wealthy if you just harness and control it. So anytime I think of debt, I just really see it as a game of life that you choose to play. And right now, you have the option to choose which team you want to join.

One team plays defense, and the other team plays offense. The people who think that debt is bad play defense; they avoid it at all costs. Any debt needs to be paid off immediately, and they really work to preserve as much of what they already have as possible. Instead of playing the game to win, they really play it not to lose. And while doing all of that is a very safe strategy, without any offense they’re not going to score.

But on the other side, though, we have the offense. They embrace debt; they don't concern themselves with paying it off early; they just want the score, even if they risk losing the game to do so. These are the people who play to win. And well, it's certainly a risky strategy that could pay off. Without a good defense, they could just as easily lose.

However, any well-calibrated team is never just one or the other. It's never an ultimatum, and no one team just plays offense or just plays defense. Instead, the best teams in the world find the ideal strategy of combining both into a winning formula. And the same thing can also be said about debt.

To me, this is what the winning combination is: if the debt cannot make you money, avoid it always. Then, if buying something will not make you more money, then avoid buying it unless you can afford it outright. On the other hand, if it will make you more money, do it sometimes. And if buying something will make you more money, then finance it sometimes.

Here's what I mean by that: just like we embrace using electricity in our day-to-day lives, we still avoid putting our finger in the electrical socket. Buying something on a credit card because you couldn't otherwise afford it is just like sticking your finger in the electrical outlet.

On the other hand, using a credit card to buy something, even though you could afford to buy it outright, but you want to get the points instead, is much like running electricity to a light bulb. Like buying a Tesla Model 3 with 0% down because you don't have any money? It's a lot like jumping into the middle of an ocean when you don't know how to swim.

However, buying a Tesla Model 3 for 0% down, even though you can afford to buy it outright, but your money makes you more money invested elsewhere, is a lot like just relaxing in a warm jacuzzi after a workout. Buying a home with 0% down on an interest-only loan so you could speculate on real estate values is like putting your hand in a fire.

On the other hand, putting 0% down on a fixed-rate low-interest mortgage on a cash-flowing rental property is like using that fire to cook your lobster and steak. So, as you can see, there are fundamental differences between the right way and the wrong way to use debt.

When it comes to me, even though I use credit cards for everything I buy, I always make sure it's paid off in full. Even though I financed 100 percent of a Tesla, it made sense because I had the money to pay for it outright. But it's cheaper for me to borrow money at a low interest rate and then use my money to go and make more money than I'm paying in interest.

Even though I went and borrowed 1.75 million dollars worth of mortgages, that's worth more to me not paid off than it is for me to pay it off. And the strategy behind all of this is very simple: it's just leverage. It's the act of going and borrowing money at a cheap interest rate so you can go and invest it and get a higher interest rate, and then you profit the difference.

That's what so many people didn't understand when they saw that I took out six hundred and seventy-five thousand dollars worth of a mortgage on a property, and that's all they focused on. They just saw, "You owe six hundred and seventy-five thousand dollars to the bank." And let me break this down because here's a very simple way of putting it: if I offered you a hundred thousand dollar loan right now with no interest, would you take it?

I think the answer for everybody is yes. Always. Because even if you went and put that hundred thousand dollars in a savings account, you can earn two thousand two hundred dollars a year with absolutely zero risk. Sure, this is still debt; it still needs to be paid back. This is still a loan, but that's not what we focus on. Remember, we're on team offense here; we're playing to win.

That 2.2 percent interest? Playing defense would have never taken that money to begin with, and by doing that, they missed out on some really big scores. Okay, but that's an easy one; everyone would take zero percent interest. But what about a hundred thousand dollars at a one percent interest rate? Would you still take it?

The answer is yes, still yes. You would always take it because even if you just took that hundred thousand dollars and you made 2.2 percent in a savings account, even though you pay one percent in interest, that still means you make one point two percent annually for no risk whatsoever.

Okay, so now we're getting somewhere. But what about a hundred thousand dollar loan and a three percent interest rate? This is where the offense and the defense strategy really comes into play because if you play the game by putting that money in a savings account earning 2.2 percent, you lose. However, if you use that hundred thousand dollars to go and buy a rental property that makes you a 6% return, you win, and you profit three percent even though you have debt.

But now let's take it up a notch. What about a hundred thousand dollar loan at seven percent? This is where the defense side starts working in your favor because we're starting to get pretty close to sticking your finger in the electrical outlet. This is the point where you need the knowledge and the self-awareness to ask yourself: at what point does borrowing money become too expensive and not worth the risk?

Like for me, the offensive strategy of holding 1.8 million dollars in debt is much like the good debt that was used in our hypothetical example of borrowing a hundred thousand dollars at a 1% interest rate. Just consider this: even though I pay a 3.75 percent interest rate, that interest is a write-off against the rental income that property generates, which means that after tax write-offs, it brings it down to a net effective cost of 2.4 percent.

Now, also because that debt is held for 30 years, the cost of that debt is actually reduced each and every year thanks to inflation. Now, the Fed tries to hold the inflation at about two percent annually, which means that 1 million dollars worth of debt in 2018 is really worth more like nine hundred and eighty thousand dollars worth of debt in 2019.

And this is really, really good news when it comes to paying down long-term loans. Even though I'm paying two point four four percent interest after tax write-offs, it's effectively reduced by another two percent with inflation, which means that net, I'm paying about point four four percent in interest on a 30-year mortgage.

After tax write-offs and inflation, I could easily make more by investing my money anywhere else and keeping the loan than I can paying down the loan just to save an extra point four four percent in interest. Like I said, this is really the difference between playing a very strategic offense versus playing an overly conservative defense.

The same thing also applies in a cash-out refinance, where the bank increases my loan by two hundred and thirty thousand dollars. But so many people fail to realize is that even though I owe two hundred and thirty thousand dollars more, they gave me back two hundred and thirty thousand dollars that I had sitting in my bank account.

Here's another example: let's just say of a hundred dollar bill, but this is a hundred dollars you cannot spend. It's there; it's worth a hundred dollars; it's just you can't spend it. Now, if you go and sell it so you can go and spend the money, you'll have to pay twenty percent in taxes, so your hundred dollars is really only worth eighty dollars if you go and sell it so you can go and spend it.

So the solution to this is by finding someone who says, "You know what? I will lend you a hundred dollars that you can go and spend, just pay me back." So in that circumstance, even though you owe that person a hundred dollars, and you still have to pay them back, you have a hundred dollars available that you can use to pay them back at any time.

Now, not only that, but because the hundred dollars you received was technically a loan, you don't owe any taxes on that. That right there is the art of real estate investing in a nutshell. I might have 1.75 million dollars worth of mortgages, but that doesn't mean that I couldn't afford to pay a few of those off right now in cash if I really wanted to.

That is the differentiation between having good debt and having bad debt. I don't take out loans to speculate on real estate values; I don't spend that loan's money on anything that doesn't make me more money. I don't take out any loans that a bank can randomly just call one day if the values decline.

I also don't take out any loans I couldn't already afford if the property sits empty. And I do all of this within my means, and frankly, the value of these properties really doesn't matter at this point for any other purpose other than refinancing.

All I care about is rental property cash flow, which in a recession tends to do pretty well. Because even if values decline and no one is buying real estate, what are those people doing? They're renting instead, which is good for me.

And the point I really just want to hammer in on this video is just this: debt is not always bad. If you have the education, the self-control, and the persistence to make smart educated risks, then borrowing money could be like playing a very good game of offense.

But if you waste it, you abuse it, and you get caught up in a cycle of just buying useless consumer crap, then it will burn you. Don't be reckless, don't be greedy, and don't ever over-leverage. Play it safe, take it slow, continue learning, and pretty soon you're gonna be 1 million dollars richer by smashing the like button if you haven't done that already.

So with that said you guys, thank you so much for watching. I really appreciate it. And for real though, smash the like button; it does really help out the YouTube algorithm, so if you wouldn't mind doing that, that would be great. Also, if you made it to the very end, you like videos like this, make sure to subscribe. And also, feel free to add me on Instagram; I post pretty much daily, so if you want to be a part there, feel free to add me there.

Thank you again for watching, and until next time!