Good Debt, Bad Debt For Real Estate Investors

The most successful real estate investors understand the difference between good debt and bad debt.

From a consumer perspective, no debt is good debt. The basic consumer goal is to be debt free.

This is not the way that the most creative real estate investors think about debt. They regard debt as an investor's best friend.

The reason for this is OPM. OPM is a short-hand way to refer to "Other People's Money." OPM is just another term for good debt.

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.

With a lever, you can move something you could not move without it. The lever means that you don't need as much strength to move the object as you would need without the lever.

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.

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.

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.

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.