Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
But then if the business fails you could lose not just the money you put into the business but also the $800k asset you borrowed against. If instead you sold the asset and used $100k to start the llc, then it failed, you'd still have $700k left. It would take 7 more failures before you ran out of money.
Not everyone agrees with Mark Cuban or Dave Ramsey that you should never start a business on a loan, and I say it really depends on the type of business involved. But I would say as a rule of thumb, cash is king.
Think of it more like this. I have a building/land worth $800K and I have it rented for $5K a month or $60K a year. I want to start another business or venture that I expect to make $80K a year, but need $300K to do it.
I can either:
A) Assume my first property is liquid, sell it, pay transaction fees, put $300K into the business to give me $500K to sit in the bank for little interest to get the $80K
B) Keep my safe property and avoid the expansion and leave my income at $60K
C) Borrow from the bank using my property as collateral. If all goes to plan, I end up with an income of $140K a year...though I will have to pay interest (and principle) on the $300K borrowed.
Even the rich keep just a small % of their net worth in cash, they have it tied up in real estate, stocks, fine art etc. It often doesn't make sense to force a liquidation, thus it makes more sense to borrow money.
There's an old adage of a bank will make loans to people that don't need them. This is what a bank is looking for...someone who will figure out a way of getting them paid because they can and not paying them back would be stupid. If I borrowed the money and the new business failed with a total loss, I would sell the property, not let the bank foreclose on it, and the bank would be paid from the proceeds of the collateral and I would keep the rest. Even if I make the bank do it, they still have to give the proceeds in excess of what is owed and the cost of collections etc. back to you, but those costs will be much higher than a person doing it on their own.
Think of it more like this. I have a building/land worth $800K and I have it rented for $5K a month or $60K a year. I want to start another business or venture that I expect to make $80K a year, but need $300K to do it.
I can either:
A) Assume my first property is liquid, sell it, pay transaction fees, put $300K into the business to give me $500K to sit in the bank for little interest to get the $80K
B) Keep my safe property and avoid the expansion and leave my income at $60K
C) Borrow from the bank using my property as collateral. If all goes to plan, I end up with an income of $140K a year...though I will have to pay interest (and principle) on the $300K borrowed.
Even the rich keep just a small % of their net worth in cash, they have it tied up in real estate, stocks, fine art etc. It often doesn't make sense to force a liquidation, thus it makes more sense to borrow money.
There's an old adage of a bank will make loans to people that don't need them. This is what a bank is looking for...someone who will figure out a way of getting them paid because they can and not paying them back would be stupid. If I borrowed the money and the new business failed with a total loss, I would sell the property, not let the bank foreclose on it, and the bank would be paid from the proceeds of the collateral and I would keep the rest. Even if I make the bank do it, they still have to give the proceeds in excess of what is owed and the cost of collections etc. back to you, but those costs will be much higher than a person doing it on their own.
D) Save up the excess income and pay cash for the $300k acquisition
Ultimately, it's a risk tolerance issue more than anything. Owing $300k on $1.1 M of real estate is, indeed, low risk if you are in a reasonable market with a sustainable business model and won't need the income for quite a long period of time. It also requires that if your own business has problems, you should be able to put the property up for rent (assuming that your business was something else to begin with).
Finally, I should note that many commercial property loans have balloon payments and there is always the risk of having a bank liquidity problem when that time comes (this is, in fact, what happened to Dave Ramsey in his younger days that explains why he is so determined to keep his business 100% debt free...)
Even so, this risk can be averted without being 100% debt free. For example, you could save up the $60k cash flow for 3 years ($180k), and then borrow only $120k to buy the $300k property or business. If you borrow on a 5-year loan, then you'll be able to pay off the entire loan before the balloon payment hits, even if your business has a lean year or two.
We're going to stay on point…
I'm not rich by any means but thank God I'm doing better than most people. I'd like to hear from people who are NOT finically stressed. Who DO have $500, $1000, or more discretionary income left over after living expenses other bills, and savings/investing are accounted for.
If you're doing well, what are your thoughts on saving versus spending? Your thoughts on money in general? The stories of others you hear about? The economy and jobs situation. Heck, even the serendipity of life….like health issues than can affect finances.
I ask because I hear more stories about people being broke. Can't save for this. No money for that.
If you have a fair amount of discretionary spending -- before or after your savings, or 401K or Roth contributions. How does it feel do be doing pretty well?
I guess I'm just feeling pretty darn blessed. No financial issues, no real health issues.
Again I'd just like to hear stories from people who aren't broke, or struggling…who are doing pretty OK.
I'm SINK, make decent money in a major metropolitan area.
Confusing post. What is meant by "left over" after both savings and spending? People often refer to things as "fixed" or "non-discretionary" when they aren't truly so, and often the line is impossible to draw without being arbitrary at some point. What about children? Are they a "discretionary" expense because you could have chosen not to have children?
Once kids exist they are no longer a discretionary idea, they are an actual expense.
Some utilities may be partially discretionary such as phone, and internet. You need them to function in current society, but bare minimum services should suffice.
Bare minimums of items to functions should be non-discretionary but to go through the effort of finding the control point is effort beyond what a lot of people are willing to do.
Even so, this risk can be averted without being 100% debt free. For example, you could save up the $60k cash flow for 3 years ($180k), and then borrow only $120k to buy the $300k property or business. If you borrow on a 5-year loan, then you'll be able to pay off the entire loan before the balloon payment hits, even if your business has a lean year or two.
I am not really experienced in this type of business myself, but from what I have seen from my friends, there is usually a narrow time window for the best business opportunities. For example, a friend of mine was a junior partner at a vet clinic and the principle vet was retiring. In order to buy the business, he needed 200K, and the retiree was only going to wait a year at most for him to get it together. He was able to get the loans, but waiting until he saved up 200K would have lost him the opportunity.
I am not really experienced in this type of business myself, but from what I have seen from my friends, there is usually a narrow time window for the best business opportunities. For example, a friend of mine was a junior partner at a vet clinic and the principle vet was retiring. In order to buy the business, he needed 200K, and the retiree was only going to wait a year at most for him to get it together. He was able to get the loans, but waiting until he saved up 200K would have lost him the opportunity.
There are other vet clinics that can be bought. If the owner was offering a steep discount then I can see taking the loan.
Realize when you are just in a floundering business market and leave it before it takes everything from you. If screwed more than once, consider getting out as some cities/towns have it set up to screw the heck out of some who try to stay. Is sad when I've read posts from the trash pickers who are bragging about the 'haul' -- a lady who left it all except one bag after a new move. But, explains things perfectly.
Really, only difference in most cities/towns is just the job market. Rest is about the same -- some good, some bad, some dirty, some worry, some suffer, some avoid and some keep silent.
According to some of the calculators I've used im in the top 1% for my age group in net worth. My story starts really from when I was 10. My parents weren't necessarily financially savvy but they taught me how to budget from an early age. I had a savings account at age 10 where I would go and deposit 5 dollars every week. I loved to see my balance accumulate. My dad used to take me to Toys R Us and id want to buy everything. After I got my allowance he would ask me what id want to buy with my allowance and after two hours in the store I wanted nothing.
When I got my first high paying job at age 18 in 2009 I made more money than I could ever dream of spending since I was a simple person. I spent the first 6 months paying off some debt and after that I maxed out my 401k for two consecutive years. When I was 20 I had a net worth of about $50,000. When I left that employer I rolled it all into a Roth IRA that I aggressively invested in a fund (FAS) that went about 250% over a 3 year period. From 2012 to 2014 I was "only" saving a little over 5,500 per year to fund my Roth. I feel during this period I could of saved a lot more but I was paying for some very dumb situations I put myself in. By 2015 I had a net worth over 6 figures that has been climbing substantially since this year my savings plan is back to maxing out 401k plus a Roth. I want to do this for about two more years and then focus most of my retirement savings ability to a 15 year mortgage so I'll be mortgage free in my very early 40's.
My story is simple. I got very very lucky. I began investing after the great recession and was investing heavily during a great market rally. I don't find joy in a lot of material items that most people value. I've drove 3 cars since 2011 that I paid cash for. The total price for all 3 was less than 5,000 total. I sold my previous 2 cars for more than purchase price. I'm not into electrical gadgets, expensive clothing, or going out to bars and clubs. I treat every expense as a macro issue. I currently wear contacts and id like to get LASIK surgery but I consider the expense of $5,000 to really cost me $20-30,000 in investment loses over a 25 year period (there's some other reasons but that's a big one).
I currently wear contacts and id like to get LASIK surgery but I consider the expense of $5,000 to really cost me $20-30,000 in investment loses over a 25 year period (there's some other reasons but that's a big one).
I don't usually say stuff like this but the $10k I spent on getting ICL implants was the best investment I ever made.
i hate to say what my dental implants cost me . especially have to get a few replced when i rejected them a few years later because i was diabetic .
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
