The best investment I never made
Monday, June 25, 2012/
The best investment I never made was not having a student loan and not buying a property.
As an entrepreneur, I’ve ended up better off (so far) by not doing these things than I would have had I done them. If I had bought a property when I was able to afford one I would have not had the working capital to start Lind Golf. Had I bought a property after I sold Lind Golf, I would not have had the working capital to start BuyReply.
If I had bought a property I would have had to service the gap between the rent and the interest repayments along with other costs like maintenance. If I could buy a property outright, or if rental income serviced the debt and made me money, then I’d buy property; but it never does. If you are negatively geared you are “hoping” that your property increases in value at a faster rate than your interest accrues.
Nobody likes to have debt, and as soon as you have it you become restricted in what you can do. If you live in your place you become tied to repaying a loan, which means you become a slave to cashflow. You need cashflow to pay the interest, and that means being locked in a job, whether you like it or not.
The same applies to student loans. It’s less of a problem in Australia because we have HECS and that is paid off over time as you earn. However, in the US, student loans are toxic and there is more outstanding debt from student loans than credit cards and auto loans combined. Starting life $160,000 in the red is like trying to run a marathon with weights attached to your ankles, yet this is what most young people are committing to.
As Mark Cuban puts it: “The crush of college debt has taken an entire generation of graduates, current and future, out of the economy: which is exactly why the economy hasn’t grown and won’t grow beyond microscopic growth rates we have seen so far.”
I’ve always tried to keep costs low and financial obligations at a minimum. While popular belief is that buying a property is the right thing to do with your money, if you have a vision and the confidence to back yourself into a venture, you are more likely to create incremental value that way than you would by purchasing a property. If you can afford to do both, then you are lucky.
If you can start a venture, then raise further capital off the back of your early efforts, chances are that the valuation you put on your venture will be more than the increase in value of a property during the same period of time.
For example, if you can start a new business with $50,000 then sell 20% of it to an investor for $200,000 in one or two years, you’ve created $1 million worth of value in that time. Do you think if you bought a property for $1 million with a 10% deposit, it would be worth $2 million in two years or less? No way.
Having debt (even good debt) stifles creativity and entrepreneurialism. It locks you into the cashflow treadmill and before you know it you can’t leave your job or take a chance, and if you do decide to start something, you’ll most probably have to sell 50% of your equity to a financier first.
I never had to do this when I started Lind Golf and never had to do this when I started BuyReply. I made a conscious decision to remain debt-free so that I could take chances.
Most people can’t take chances. They’re already on the cashflow treadmill. They have commitments. If you can take chances and have the confidence to back yourself, go for it because you’re already in a privileged position.