Good Debt, Bad Debt

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.

In contrast, the most successful real estate investors know that debt is an investor's best friend. Why?

Good debt allows you to take advantage of "other's people's money," known as OPM.

Another word for good debt is "leverage." In physics, a lever is something that allows you to move something else. If you stick a rod under a rock, and then push down on the lever, you can move the rock.

If you have to rely on your own strength, you are limited in what you can do. A lever allows you to move what you could not move without it.

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.

Consider a situation when you don't have enough of your own money to buy an investment property. When you treat borrowed money as a lever, you can use the borrowed money to buy the property you could not afford with your own money. This is the power of leverage.

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.

In other words, consumer debt produces no leverage. It doesn't provide a tool to create wealth. It is bad debt.

So what is good debt? Good debt is a tool to create wealth. This means you can borrow the same $3000, and invest it in property to create profit. When you do this, you have good debt.

If you want an example of using debt to create wealth, consider Donald Trump. He carries tremendous debt, which he leverages to build properties that in turn create even more wealth. Some of the richest people on the planet have the greatest amount of debt.

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.

Article Source: http://mylilpeanut.com

Do you want more money to buy real estate? Discover how to "Partner For Profits" in a nomoneylimits.com/partnerforprofitsebook.htm ">real estate investing book about partnerships with like-minded investors. Become a No Money Limits investor.

Please Rate this Article

5 out of 54 out of 53 out of 52 out of 51 out of 5 

Not yet Rated