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I've got news for you - it is ALL play money
money is only a concept
Tell that to the bank manager
AgreedWhether or not money is 'real' isn't really that relevant. The fact that most people will exchange goods or services for it means that it's real enough to perform its intended task.
Here's a scenario I was thinking about the other day. You buy an IP say for $300K and it goes up say 20% over 2 - 3 years. So now it is valued by a bank valuer at $360K. I go sign papers at the bank to draw down some of the available equity - say $30K.Generating money is another matter. Converting it into 'real' money is where the rubber really meets the road.
Here's a scenario I was thinking about the other day. You buy an IP say for $300K and it goes up say 20% over 2 - 3 years. So now it is valued by a bank valuer at $360K. I go sign papers at the bank to draw down some of the available equity - say $30K.
What do I do for the $30K - nothing (signed a paper)
I buy a car for $30K (say)
Where did that car come from? I own it. I drive it. I can sell it.
The house I had is exactly the same as it was 3 years ago. Maybe in worse condition.
Didn't I just get money for free?
If you don't agree, lets say I decide not to make any repayments to the bank. They repossess it and sell it for market val completely extinguishing the debt.
So where did my car come from?
More exposed, Yes. Paying interest on additional debt - Yes. Say the rental increase covers the additional repayment and prices don't soften - this is say 2002.No? You've increased your initial loan balance, and are now paying interest on that debt. You're also more exposed to price volatility, in the event that prices soften after that valuation.
The market is OK - rising steadily. The bank takes it to auction and a good marketing campaign. They get a good price and actually owe me some of the proceeds. They send me a cheque for $10K and I get a bad credit rating.They wouldn't though, because I assume the car wouldn't be used as security on the loan. They might foreclose on your house, which would leave you out of pocket for the selling costs, especially seeing they won't be trying too hard to get top dollar.
Yes, but remember I had only drawn $30K of $60K worth of equity - pretty safe.If you had no existing equity in the property, you'd be lucky to see nothing from the sale, assuming you didn't owe them afterwards. You'd have a spiffy new car to live in, though...
Where did my car & $10K cash come from? (The new home owners now) But before the bank sold me up, where did my car come from?
None of the money is magic - equity isn't free money, it's just a reflection of the willingness of the market to pay a higher price for the asset and therefore the bank's willingness to adjust their perceived value of your security against the loan.
Fair call, we all rationalise things differently - I'd love to have a LOE strategy one day but first I have to worry about earning lots of your free money stuff to make it work