How Debt Builds Real Estate Wealth

What do the most knowledgeable real estate investors know? They 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.

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

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.

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.

When you borrow money, you create a type of leverage. You can use someone else's money as a lever to accomplish what you could not do with your own money. This type of debt is a powerful tool. You are using someone else's money for your own purposes.

Say you are looking at an investment property. You'd like to buy it, but you don't have the money. But someone else has the money. So you borrow the money and buy the property.

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.

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

If you want to create wealth, the fastest method is to use borrowed money to do it. You might prefer to talk about using leverage and OPM, but in reality, these are simply another way to refer to good debt.

Article Source: http://www.articlemonk.com

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