Good Debt, Bad Debt

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.

This type of good debt has its own name. It is called "OPM." When you take on good debt, you can use "other's people's money."

Physics describes the concentration of power of a lever. Think about moving a rock by putting a crowbar under the rock and pushing down on it. The lever allows you to move the rock. Good debt, in the form of OPM, is a type 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.

Leverage also works with borrowed money. When you use someone else's money to accomplish what you could not accomplish without it, debt becomes a lever. This leverage allows you to use somebody else's money for your own purposes.

The reality is that someone always has the money you need to buy investment property. If you don't have it, you can borrow OPM to buy property you could not afford to buy with your own money.

You use debt as a tool to allow you to buy something you could not buy on your own. If this is a good investment, the debt will allow you to create profit for yourself. This is an example of good debt. You are using debt to create wealth.

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.

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.

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.

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