Technical debt or how to finance your real estate empire

Every now and then I see people questioning the usefulness of the technical debt metaphor. I think it’s brilliant though often misunderstood or not fully utilized by technical people. It may be helpful to see its potential by taking a closer look at one industry I’m more familiar with, i.e. real estate.

Let’s focus here only on people in a situation similar to mine, i.e. where real estate is a “side business”, mostly treated as a way to allocate your investments and retirement savings vehicle.

Real estate is one of those industries in which very few people can avoid any form of debt. Even if they can, they rarely want to do that.

Why?

Because even if you can afford it, building your Empire (or “empire”) using just cash is not very efficient, relatively slow and, counterintuitively, it’s not the least risky path. Even if you have enough cash to buy something, it may be better to take a mortgage anyway and keep the cash for a rainy day. For example, to help you survive a pandemic where your income may even drop to zero for a while.

On the other hand, maxing out your credit cards to get a downpayment is plain stupid in most cases, though sometimes may be justified. It may allow you to secure a really awesome deal, so if you’re able to pay it off quickly and know it’s an investment with a very low risk it may be worth it. If the deal is time-sensitive, it’ll be gone before you even call the bank to ask how much they can borrow you.

So that covers a couple of the edge cases (out of thousands) and only three options of financing the deal, i.e. your own cash, credit cards, and mortgage. There are many more, e.g. contrary to common knowledge borrowing money from the banks often is not the best and safest option. They may have stupid credit risk scoring rules (have you known not all banks understand how amortization works and don’t realize it’s the virtual cost?), offer worse conditions than your friends that prefer to invest in your business than keep their savings at 0.001% interest in the bank, typically require a lot of paperwork and are not very flexible in negotiating contract terms, etc. So the more “advanced” your business becomes, the more options you discover, and the more often you realize rules of thumb are not that helpful.

To make the long story short, good debt/bad debt is part of business 101, even for side businesses, yet it’s a very nuanced and complicated topic. There are no simple black and white answers, managing debt is a constant process of balancing risk with future potential while adapting to changing circumstances around you. Whether a decision is reasonable depends on your overall strategy, the current situation in your business, and overall market conditions.

I think at the end of the day, taking on technical debt is a business decision, not technical. The role of the technical team is to clearly articulate potential alternatives, associated costs, and risks, not to decide on a financing strategy for the business. It’s a very hard job and takes a lot of practice, but if you can learn it you’ll provide incredible value for the business. Especially if you learn to do that using a language and decision framework they’re using daily, giving them a chance to really understand the situation.

It may be a good rule of thumb for beginners to avoid the debt altogether, while they learn, but insisting on always producing perfect code or run a cash-only business won’t get you very far in the real world.

And let’s be clear, some situations are really off-limits, such as borrowing money from the mafia or building MVP to validate ideas using microservices and Kubernetes 😉 But that’s a topic for another post.

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