If you want true wealth, prosperity, and affluence as a real estate investor, debt can get you there. Here’s how you can use it constructively to create wealth and cash flow.
As a real estate investor, you may be wondering how you can use debt to your advantage.
After all, isn’t it the enemy?
While it’s true that too much debt can be a bad thing, it can be one of the most powerful tools in a real estate investor’s arsenal.
Good vs Bad Debt
The shortest distance between you and having no wealth is taking on debt. This includes credit cards, car payments, student loans — whatever doesn’t put money in your pocket.
Bad debt doesn’t just drain your bank account; it also robs you of potential wealth by tying up your money in assets that don’t appreciate. In other words, it is money you owe on things that go down in value.
On the other hand, good debt is an investment that puts money in your pocket. It’s debt used to purchase assets that appreciate or produce income. This includes investments in properties.
Real estate is the best example of good debt because it has the potential to generate both capital appreciation and cash flow. And unlike other investments, you can use leverage to purchase properties.
How Debt Creates Wealth in Real Estate
The key to creating wealth with debt is understanding how to use it effectively. When you use it to purchase assets that appreciate or produce income, you can grow your wealth faster than if you were only using your own money.
For example, let’s say you wanted to purchase a rental property for $100,000. If you had to come up with the entire purchase price yourself, it would take you 10 years to save up the $100,000 (assuming you could save $10,000 per year).
But what if you could use debt to purchase the property and only had to come up with a down payment of $20,000? In this case, you could buy the property in just two years.
Not only that, but the rental income would go towards paying off the mortgage, and you would also benefit from any capital appreciation.