Debt is not evil. My boy Dave Ramsey wants to tell you to never go into debt, but the wealthy get rich with debt. Not all debt is created equal. Some debt is good, contrary to what some financial ‘experts’ and politicians suggest. Debt that is paid off by others or debt that actually generates income is good debt; assume all other debt to be bad.
Get rid of all debt that cannot be funded by others or does not directly generate income. Make it a rule that you never use debt that won’t make you money. I borrowed money for a car only because I knew it could increase my income. Rich people use debt to leverage investments and grow cash flows. Poor people use debt to buy things that make rich people richer.
I invest in real estate—going into debt with it—and here are just a few of the reasons why:
1. Positive cash flow.
One of the biggest benefits to real estate investments is that leases generally secure the assets. This provides a regular income stream that is significantly higher than the typical stock dividend yields.
2. Using leverage to multiply asset value.
Another important characteristic of real estate investing is the ability to place debt on the asset, which is several times the original equity. This allows you to buy more assets with less money and significantly multiply asset value and increase equity as the loans are paid down.
3. Low-cost debt leveraged to multiply cash flow.
Placing “positive leverage” on an asset allows for investors to effectively increase positive cash flow from operations by borrowing money at a lower cost than the property pays out. For example, if a property generating a 6% cash-on-cash return were to have debt placed on it at 4%, the investors would be paid 6% on the equity portion and approximately 2% on the money borrowed, thereby leveraging debt.
4. Hedge on inflation.
For each dollar that is created, there is a corresponding liability. Real estate investments have historically shown the highest correlation to inflation when compared to other asset classes, such as the S&P 500, 10-year Treasury notes and corporate bonds. As countries around the world continue to print money to spur economic growth, it is important to recognize the benefits of owning income producing real estate as a hedge against inflation.
5. Asset value appreciation.
Over time, more and more inflation has made it into the economy, drastically reducing purchasing power. However, income producing real estate investments have historically provided excellent appreciation in value that meet and exceed other investment types. Properties historically increase in value as the net operating income of the property improves through rent increases and more effective management of the asset.
Debt is not bad. The wealthy get rich from debt.
Dave Ramsey is great, but you need some good debt in your life. Before you can invest anything though, you must have significant savings. To have savings, you must have significant income. Get on my Playbook
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