The most successful real estate investors understand the difference between good debt and bad debt.
Most advice to consumers agrees that the ideal situation is to be debt free. Most consumer education treats all debt as bad.
Unlike this consumer ideal of being debt free, the most knowledgeable real estate investors welcome debt. They consider that debt can be a real estate investor’s best friend.
Good debt allows you to take advantage of ‘other’s people’s money,’ known as OPM.
In addition to OPM, another way that investors talk about using borrowed money is the word, ‘leverage.’ Consider using a crowbar to move a heavy object. The crowbar allows you to move the heavy object. Good debt is an example of leverage.
Levers allow you to move something that you couldn’t move if you tried to pick it up with brute strength.
This concept from physics is relevant to borrowed money. You can use someone else’s money as a lever to accomplish a bigger task than you could accomplish with your own money.
The reality is that someone always has the money you need to buy investment property. If you don’t have it, you can borrow OPM to buy property you could not afford to buy with your own money.
This is an example of good debt. You use borrowed money to create wealth. Debt is a tool you can use to buy what you could not buy with your own money. If the investment creates profit, you create profit from the leverage of good debt.
Compare good debt with bad debt. Consumer debt means going into debt for something that won’t bring you profit. If you charge $3000 for a plasma TV, you have created bad debt. The TV is not going to bring you profit. It is going to cost you money.
Consumer debt does not give you leverage. It is not a tool you can use to create wealth. This is why consumer debt is bad debt.
The critical distinction between good debt and bad debt is whether or not the debt is a tool to create more money. If you borrow the $3000 and use it as a tool to create profit, this is the definition of good debt.
Some of the biggest debtors on the planet are people like Donald Trump. Donald Trump owes fantastic amounts of money. He’s in debt, but he leverages the debt to build his skyscrapers.
Whether you call it leverage, or OPM, good debt is one of the fastest means to creating wealth.
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