Here’s a very basic conversation about “good debt” versus “bad debt.”

Is there “good debt”? Years ago, I viewed “good debt” as an oxymoron.

This good vs. The bad debt conversation comes up a lot in real estate conversations. Especially for investors just starting out. And generally, understanding “good” debt has been more difficult for women (sorry, girls). We seem to be much more concerned with paying the bills for our house and our children today. After all, doesn’t most of society tell us that debt is bad? So how is any of that good? And because?

My husband and I argue about “good debt” vs. “Bad debt” for two and a half years before I finally got it (and by “that”, I mean I finally understood his argument). He didn’t want debt and was absolutely NOT interested in finding something called private lenders. Why in the world would we want even MORE people besides mortgage companies to owe you money?!?

But, finally, I was convinced. “Good debt” is a real thing, and not just an oxymoron. I learned something that I had not understood before: leverage.

Here is a definition I found for leverage: “using borrowed capital for (an investment), expecting the earnings to be greater than the interest to be paid.”

Yes, “earnings earned to be greater than interest due” means that you can pay the money back to the lender and still have earnings (money) left for you. If you do this once, it is a wonderful thing. If you do this ten times, it can be amazing. So, if done right, taking on more “good debt” can increase your own long-term earnings.

Not all debt naturally pays a profit, not a big screen TV or other car, but investment debt done right can definitely do it. Here’s a very basic way of looking at it:

Example 1:

Let’s say you personally have $ 100,000 in cash. You can buy a house for $ 100,000 and get a monthly rent of $ 1000 for it.

Example 2:

Or you buy ten $ 100,000 homes, putting in $ 10,000 for each, and you get $ 1,000 per month of rent on each home. Yes, you have a debt to pay with the borrower in each one, but you also have profits left for you in each one.

• You only need $ 100 of profit on each one to receive your income of $ 1000 per month.
• Plus, you have someone else paying those mortgages.
• Plus, you receive tax write-offs on the interest you pay to your lenders.
• You receive additional tax deductions on the depreciation of those properties.
• Over time, your tenants, not you, pay off the mortgages.
• You end up with ten houses each paying $ 1000 per month for rent. Instead of the original house that paid $ 1000, you now have ten houses that pay $ 1000. And still, you only paid your initial $ 100,000 for ten times the reward.

That is leverage!

Another important fact when buying a property is that you have an asset against your debt. It is not like borrowing for a larger TV or even a car where the purchase is of little or no value. In fact, those are not assets but passive. With real estate, if circumstances go wrong, you have the option of turning over the asset to the lender to satisfy the debt. A much safer deal for everyone.

Begin to see that this “good” debt is an investment in your future. The important thing is that you must buy well. Be sure to buy at a deep discount, never pay full retail price. That leaves plenty of room to maintain value even if the market and property values ​​drop (remember 2008, 2009 and 2010?).

Does this make you think of real estate debt differently? What can you add?