Debt can be good.
That’s probably not what your parents told you.
Well, some of the most successful real estate investors are tens of millions of dollars in debt.
How can that be?
It is because the value of the assets that they have bought exceeds the amount borrowed. Additionally, the real estate asset provides passive monthly income and other wealth benefit.
It is not to the investor’s advantage to pay off the loan, even if they could. That’s good debt.
What about having $10,000 in credit card debt. Is that bad?
Well…what if the $10K in credit card debt is at a 0% interest rate, and you borrowed that $10K to put in an investment that has returned 15% to you? Is that bad credit card debt or good credit card debt?
Debt is not only used for consumption. It is also used for investment.
In fact, when real estate values appreciate, the higher proportion of debt one has on the property, the higher the rate of return on one’s initial investment.
That’s right! More debt = more return to you.
This is called financial leverage.
Debt = Leverage.
In simple terms, when you put a smaller down payment on a property, you need a bigger loan. That means you create more debt, which is more leverage.
If you have a certain lump of money and choose to place a big down payment on a property, you might only be able to buy one. Let’s just stay that’s $350,000 worth of property.
Instead, if you use that same lump of money to place three small down payments on three properties, let’s say those three properties have a total value of $1 million.
Ten years from now, do you want to own more property or less property? If you’re reading this, I’m pretty sure the answer is emphatically “more”.
The smaller down payment that you make, the more property that you can control.
If property appreciates 5% annually, do you want that 5% return on $350,000 or $1,000,000?
As you can see, controlling a smaller chunk of several properties can magnify your wealth much faster than owning a large chunk of one property.
The wealthy know that successful real estate investing is not about ownership, but control.
With more borrowing (leverage), one controls more.
What enabled more control? Debt.