debt is not always a dirty word

Let me preface this with noting that I am only chatting about land debt. Certainly car debt or credit card debt or borrowing money for anything that looses it's value, like a car, is not financially beneficial. I want to throw out what I feel is the exception and that is land. I applaud anyone that can pay cash for land and own it without debt, but many of us cannot.

Here are the current numbers:
Current 30 year mortgage (no penalty to paydown fast or pay it off early) 4%
That interest is tax deductible, so if you're in a 25% tax bracket & deduct that interest, your true cost of borrowing $$ is 3% (100% - the 25% deduction = 75%. 75% of a 4% interest charge = 3%)
That's cheap money.

Land values historically appreciate just over 5% a year and if it is a forest, that value increases on average at 7% historically. At a 7% annual appreciation, the value doubles in 10 years.
Don't we all wish we had bought land 10 years ago, because land prices were so much cheaper? In addition, supply and demand run prices up and in the current market, many people are seeking land and a simplier life aka great demand = higher prices.

I am seeing a lot of comments and posts about staying away from evil banks & bankers and I get it, but when you approach debt as a responsible asset, the bank can work for you. To me, it's a numbers game - I can save and keep my savings ultra safe (don't want to risk any of it) so my return on my savings today may be just 1%, and I'm going to have to pay the governments taxes on this meager interest so my savings would only grow my .75%. So if my savings are getting me less than 1% and the land I want is appreciating in value at 5%, I'm in the hole. If I wait 10 years to save enough to pay cash, I will end up spending more for the property than it would have cost me in interest payments. When you add in all of the cool stuff that could be done over a 10 year period to the land, things like building a house (again the cost of that may well increase) not to mention the advantage of being 10 years younger physically, it's worth considering an earlier purchase. This senario is a current situation with low interest rates; there have been times when interest rates were much higher than then growth of value of property and borrowing would have certainly not been smart.

While I agree that debt is not always bad (especially when you factor in inflation), be careful about calling land a safe investment with a historic 5% rate of return when price to rent ratios are at a 50 year high.


U.S. Housing also seemed like a good safe investment back in 2005...

Marianne Cicala wrote:So if my savings are getting me less than 1% and the land I want is appreciating in value at 5%, I'm in the hole.

First of all, you are not really in the hole. You may feel like you are missing out but that 5% increase is not a "real" gain till the property is sold. Nothing wrong with taking out a mortgage but to buy because you think land is safer or appreciating faster than cash is flawed.

John makes excellent points and his graph show the exponential nature of those 2 values running away from each other. That <1% on your savings is being kept artificially low to get you to chase yield. I don't want to get too into it but for example the Empire State Building was bought/built at the peak and values crashed shortly thereafter. It took 25 years for the value of that property to come back to par.

I completely agree with both of you, if I were speaking about land purely as an investment - I am talking about it as a destination. Quite a different thought process for me. I've invested in property for a flip, and in that senario, your points are very valid. Both of my adult kids pay a fortune to rent, neither care to buy which is pretty common today aka the rent data (which I have not seen graphed before). They have not decided on their destination and don't want to be obligated long term to any property or city for that matter. Once they do come across somewhere that they want a vested interest in, a more permanent home(stead), then the numbers are worth running, in my opinion. Just a different thought approach to a lot of threads about only buying destination land with cash.

Hi Marianne,

Thanks for your thoughtful and friendly approach, and for bringing up a topic that is on lots of Permies' minds.


I've got to quibble with your description of income tax treatment.
Lots of folks in the US don't pay any income taxes, (43% of households) so for almost half of people, this is irrelevant, there's no savings to be had.
For the rest, the savings is as you described... but it's 25% off only for couples earning well over $85k/year. That's not very many!
AND THEN, it's only a savings if you itemize your deductions. Your standard deduction (married) is about $12k. So IF your interest deduction and all your other deductions (charitable giving, etc) add up to more than $12k, then you can itemize.

Exactly how many Permies here are in the 25% tax bracket AND are itemizing? I wish I knew, but I guarantee it's not many.

-If you're among the 43% not paying any income tax, a tax savings won't occur for you.
-If you're among the65% not itemizing, a tax savings won't occur for you.
-If the above two don't describe you, BUT you're earning less than $85k/year (married), then the savings will be less than you described.

So what you've said isn't technically inaccurate, it's just true for almost nobody.
(I'm giving you nationwide averages here. My wife happens to be a tax preparer, and she says that the day-to-day anecdotal evidence lines up with this, too. )

That's one thing. Tax savings for mortgage interest is a special case, not a typical benefit.


Second, John Wolfram beat me to punch to point out that the high price of land right now is a reason NOT to buy. The price has gone up, therefore I should buy some? No. The price has gone up, therefore I should NOT buy some.



There's a third one. The career trap. A commitment to paying a mortgage is a commitment to maintaining a steady income. It's a plan to NOT take any risks (like starting a business) that might decrease your income below a certain threshold. It's a promise to only do things with your life that bring in at least as much money as what you're currently doing, regardless of how your situation might change. Regardless of getting divorced or disabled. Regardless of developing a spiritual, artistic, ascetic, or philanthropic streak. Regardless of coming to hate your job. (Drew Carey on hating your job: https://www.youtube.com/watch?v=Ph9I-qPQ6FU)

A mortgage is not too bad an idea for someone who's confident their income is going increase slightly for the duration of the mortgage, with no gaps or up-and-down swings.




"When you add in all of the cool stuff that could be done over a 10 year period to the land...
This is the real reason. I want it now, and I'm willing to pay the price, both in money AND freedom, to have it now. If someone's clear on the price, and they're willing to pay it, I say go for it. But only if the really understand the price.

Hey Mike -
You are spot on - My point was to throw a different approach, that there is not 1 correct way to approach buying land; there are so many variables, all of which should be considered. "IF" is so very different for everyone, that I wanted to make the point that exploration of individual situations is so very beneficial. To discount using a bank because they are sketchy, may be doing yourself a disservice so I wanted to throw out the other side of the coin so to speak. Reading someone else's approach or philosophy is great food for thought, but individual exploration is so very important.
thanks!

I disagree, in my opinion mortgages are a port of a non-sustainable system which crushes and leaves in poverty vast numbers of people on a periodic basis.
Another aspect of mortgages, especially in fractional reserve banking, are (in my opinion) artificially high driven prices, way beyond the reach of an average person, which in effect becomes even more dependent on financial institution and even more vulnerable to manipulations of the financial market.

High rent prices we see these days are direct result of financial manipulation which caused many people to lose their mortgaged house and who now are forced to rent. The high rent prices keep the real estate prices high and so it perpetuates.

My approach to debt is one of determining which systems I want to devote my life to. Do I want to dedicate my life to a system that enriches debt-predators, or do I want to build a system in which bankers are marginalized? I sure know the pain of being enslaved to debt. No big deal when times are good, but in my life, times have never stayed good for a whole decade. There are plenty of family problems, and health problems, and financial problems, and social problems, and other problems. Adding the necessity of paying off a debt onto the top of any of those problems is not something that I will ever again consent to in my lifetime, regardless of how much I want something that I can't afford to pay for today.

A few times a year I take a scathing inventory of myself in order to answer the question, "What actions am I involved in today that support systems that are not in harmony with my beliefs". A year ago I determined that I shouldn't be buying tomatillo salsa from the grocery store... Because I have the ability to grow all of the ingredients on my farm. Therefore, I consider it my duty to make my own tomatillo salsa so that I don't support the system of monoculture-mega-ag that produces salsa for the grocery store. Sure, it's only a few dollars that are denied to the intermediation culture, but a few dollars repeated hundreds of times adds up.

Joseph Lofthouse wrote:
Do I want to dedicate my life to a system that enriches debt-predators, or do I want to build a system in which bankers are marginalized?

As far as i can see banks are one of the main driving forces of the 'modern' way of life based on exploitation of the environment in general and humanity in particular.

I also believe there's a danger in seeing worth of something according to how much dollars it can get exchanged for. It's been imprinted in our thinking very deeply and became a religion of sorts. But that can be used to justify any kind of wrongdoing just like in the ever popular saying: 'Nothing personal, it's just business'.

We went into debt for our house/acreage, but we attempted to do it as reasonably as we could. We didn't want to move away from our family, so there was no way we could get land for cheep. Anywhere within a three hour drive of us has land selling for $100,000+ an acre. There was no way we could save up that money, let alone money for a house to go on it, while still giving our child a safe place to live and thrive. It was very important to us to raise our child(ren) in a safe place full of nature and room to roam. So, we put down 20% on a $200,000 manufactured home on five acres at 3.74% interest. Our mortgage and property taxes cost the same as our rent was a two bedroom house in a crime-ridden part of town (a marijuana store is now opening up next door to that house. Yay Washington!)

Did we make the best financial decision? Not likely. Moving to another state would make more financial sense, but it didn't make sense for the goals we had (staying near family, etc). Yet, with interest rates sooooo low, taking out a mortgage is not such a bad idea. Our financial adviser actually advised us against paying our mortgage down in advance because that money could reap better rewards when invested, because the interest on our mortgage is so low (with higher mortgage rates, it makes sense to pay it off early).

I think the main thing is to remember that money is there to be used to achieve your dreams and goals. We live very frugally, but we don't let the goal of being frugal overwhelm our other goal of raising our child(ren) in a safe place near family full of nature. It's about balance.

I look at it this way. I need a place to live. Should I pay rent and make someone else rich , or is there a place that I can get for about the same monthly cost, and would allow me to grow things, with the potential to also sell those things.
Maybe instead of working two jobs to pay rent , I could make a property become one of those jobs.

Maybe instead of being "trapped" in someone elses home or an apartment, where I cannot garden, I would be happier/healthier on a small lot of my own.

I guess I am one of the lucky ones. My first two properties each doubled in price over 15 years. I rolled the profit into better properties.

I also always pay a little extra each month to try and pay down the mortgage. Even a little bit. It is amazing how much the banks are making on a 200,000 loan,over 30 years, even at 3 or 4% interest. I feel that I cannot make that kind of money through investing in stocks etc. In fact I have lost thousands over my life time in that game.

My husband and I make a fair amount, are in a high tax bracket and we do itemize our taxes.

To Marianne: I want you to reevaluate your outlook on that mighty mortgage interest tax deduction you are touting. You realize that you only get a % of that interest as a deduction, correct? So you are essentially advocating for people to pay for the privilege of getting a portion of that money off their tax bill. How about I pay no mortgage interest, pay a slightly higher tax bill because I do not have that deduction, and take all that money that I would have paid the bank in interest and invest it in something else. Now THAT is smart.

Debt is only a positive tool if you really don't understand debt.

Mike Cantrell wrote:Hi Marianne,

Thanks for your thoughtful and friendly approach, and for bringing up a topic that is on lots of Permies' minds.


I've got to quibble with your description of income tax treatment.
Lots of folks in the US don't pay any income taxes, (43% of households) so for almost half of people, this is irrelevant, there's no savings to be had.
For the rest, the savings is as you described... but it's 25% off only for couples earning well over $85k/year. That's not very many!
AND THEN, it's only a savings if you itemize your deductions. Your standard deduction (married) is about $12k. So IF your interest deduction and all your other deductions (charitable giving, etc) add up to more than $12k, then you can itemize.

Exactly how many Permies here are in the 25% tax bracket AND are itemizing? I wish I knew, but I guarantee it's not many.

-If you're among the 43% not paying any income tax, a tax savings won't occur for you.
-If you're among the65% not itemizing, a tax savings won't occur for you.
-If the above two don't describe you, BUT you're earning less than $85k/year (married), then the savings will be less than you described.

So what you've said isn't technically inaccurate, it's just true for almost nobody.
(I'm giving you nationwide averages here. My wife happens to be a tax preparer, and she says that the day-to-day anecdotal evidence lines up with this, too. )

That's one thing. Tax savings for mortgage interest is a special case, not a typical benefit.


Second, John Wolfram beat me to punch to point out that the high price of land right now is a reason NOT to buy. The price has gone up, therefore I should buy some? No. The price has gone up, therefore I should NOT buy some.



There's a third one. The career trap. A commitment to paying a mortgage is a commitment to maintaining a steady income. It's a plan to NOT take any risks (like starting a business) that might decrease your income below a certain threshold. It's a promise to only do things with your life that bring in at least as much money as what you're currently doing, regardless of how your situation might change. Regardless of getting divorced or disabled. Regardless of developing a spiritual, artistic, ascetic, or philanthropic streak. Regardless of coming to hate your job. (Drew Carey on hating your job: https://www.youtube.com/watch?v=Ph9I-qPQ6FU)

A mortgage is not too bad an idea for someone who's confident their income is going increase slightly for the duration of the mortgage, with no gaps or up-and-down swings.




"When you add in all of the cool stuff that could be done over a 10 year period to the land...
This is the real reason. I want it now, and I'm willing to pay the price, both in money AND freedom, to have it now. If someone's clear on the price, and they're willing to pay it, I say go for it. But only if the really understand the price.

I decided to hit upon another point.

Say you have a $100,000 mortgage. 30 year loan. 3.92% interest. The total amount you will pay over 30 years will be 170,213. Sure, property goes up in value but is it going to go up in value enough to cover the 70,213 interest you paid?

If you pay cash for a property any increase in value goes directly to your pocket. With a mortgage you do not get that.