Good Debt, Bad Debt
The savviest real estate investors know the difference between good debt and bad debt.
Consumers are taught that all debt is bad. The ideal consumer goal is to be debt free.
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.
Physics describes the concentration of power of a lever. Think about moving a rock by putting a crowbar under the rock and pushing down on it. The lever allows you to move the rock. Good debt, in the form of OPM, is a type of leverage.
Levers allow you to move something that you couldn’t move if you tried to pick it up with brute strength.
Leverage also works with borrowed money. When you use someone else’s money to accomplish what you could not accomplish without it, debt becomes a lever. This leverage allows you to use somebody else’s money for your own purposes.
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.
Good debt allows you create profit. It gives you a tool to buy an investment property you could not buy with your own money. Profit from the investment property turns into your wealth created by debt.
This is not what happens when you take on consumer debt. If you buy an item, such as a plasma TV for $3000, you have taken on bad debt. The TV costs you money. It does not become a means to create profit. This is the difference between good debt and bad debt.
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.
When you borrow the same $3000 to invest in property that leads to profit, debt is a tool to create wealth. This is the definition of good debt.
Debt is the primary wealth-building tool of some of the richest people in the world. Donald Trump is an example of someone who knows how to leverage debt to create even more wealth. He uses borrowed money to acquire and build even more properties.
This means that good debt is one of the fastest routes to creating wealth. You can call it leverage or OPM if you want, but these terms mean the same thing. You are using borrowed money to make money.