Debt is generally considered by most people as something that can have serious impacts on their financial situation. The questions asked from real estate investors are:
- Is having debt good or bad?
- How much debt should one have?
- Can a person increase their wealth positively with debt?
To be able to answer this important question let’s look at the definition of debt.
Debt is described as the process where one party borrows money from another entity.
Debt is therefore something that most people will have at some stage of their lives unless they are extremely fortunate.
Debt is further explained as the means of purchasing items or goods that the person can’t afford at the present time but has the means to repay this amount plus interest and costs over a period of time.
Having debt is thus something that can impact on our life but depending on what it was used for, could be either GOOD or BAD.
Bad debt is thus best explained as the process where money is borrowed to purchase goods or items that have no lasting value for the purchaser and is therefore classified as being depreciating assets.
Many people use these debts when they live beyond their means.
Examples of bad debt are:
- Credit cards not paid in full at the end of each month.
- Motor vehicles start their depreciating cycle the minute you take ownership.
Good debt is defined as debt that will increase the net wealth of the borrower both immediately and over the period that it will be repaid.
Buying a property and renting it out at an amount exceeding the mortgage payment is a great example of good debt.
Examples of good debt are:
- Real Estate, due to the fact that the property will appreciate in value over the years.
- Investing in exotic and rare vehicles.
- Antique furniture and paintings.
- Any type of sought after collectables.
Therefore, any type of debt allowing you to have a positive cash flow after making the investment purchased using debt is considered GOOD DEBT.
In closing, debt is not always bad but the secret is to use debt in a way that it works to your advantage and allow you to leverage it in a way to increase your wealth.
An easy way to sum it up is bad debt costs you money each month until the sum is repaid whereas good debt yields money each month.