The subject of debt creates a lot of controversies around pretty much everybody that encounters this subject. Everyone, once they start hearing more about debt, could get confused because of what people tend to say.
What exactly is debt? Is it really truly as bad as you think it is or is it really as bad as some people claim it is? You have all kinds of extremes. You have the ones that hate debt because “is really bad for you”. You shouldn’t have any debt, they say. You shouldn’t have any credit card. You shouldn’t do anything with it because it’s bad. It can consume you, you wind up paying interest and all of that.
Then, there’s the other side of the spectrum of people, we could talk about shopaholics, people who have a lot of debt around them, stuff that perhaps they don’t even need, but they have. They have that debt right there because they want to get a lifestyle, they want to live something that it’s beyond what they can actually afford to get, and they’re drowning in debt.
You could leverage your debt to your advantage. Ask yourself questions like:
- What are the key differences?
- How can that actually help you as a real estate investor?
- How can that help you as a person, as a human being?
- What can really debt do for you?
First things first, let’s forget about being extremist. Let’s consider simple terms like “bad debt” and “good debt”.
Bad and Good Debt
What makes up bad debt? A lot of people think that a credit card it’s something that can be considered as a bad debt. Why? because you’re accumulating interest and stuff like that. Therefore, I have to work really hard to pay for it, but can credit cards be good debt as well? Yes, credit cards can be a good debt.
When can credit cards become a good debt? For example, If you invest in real estate with credit cards and you use some of this money as funding for the downpayment of one of your properties, you are taking advantage of the good debt.
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You have a credit card that you’re going to use as a down payment and then you are simply going to finance the rest with a mortgage. What you wind up getting out of it is you’re going to have a nice property that you’re going to wind up collecting rent out of. You get rent and with that rent, you will be covering the mortgage, but at the same time, you will be also covering the credit card payment, and therefore you’re reducing both of those debts without having you to do any physical work whatsoever because if this is a property that you’re renting out, that makes it a passive income.
That’s basically what makes a good debt. If you’re using that credit card to buy expensive shoes to go partying or to get the latest Louis Vuitton bag, none of these items are actually paying in itself. Remember they depreciate the minute you walk out of the store. That means the debt is still there.
We’re talking about a pair of shoes that can cost up to $1,000. The minute you walk out of it, it loses value because you’re walking with them, so, therefore, they get all dirty. It’s not creating any source of passive income whatsoever, because it’s not like you’re going to rent that out or anything like that. You’re buying it for you, unless you’re buying it with a purpose of renting it out, then that’s another subject.
If you have to work really hard, sweat your life out in order to be able to pay for this credit card debt and you’re not in your best times, maybe you have to think what is the benefit for you if you’re starting your real estate business or any other business.
If we add the accessories to this example,the next thing you will know is that you’re stuck with $4,000 worth of credit card debt, and none of it, it’s paying by itself.
Distinction between Good Debt and Bad Debt
No one can expand in anything without the use of debt. Think about those big companies who issue debt and stock, they need money, they need to get into debt in order to grow, and therefore they need to borrow money. It’s the same thing for you as a real estate investor.
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It’s impossible to buy an entire building or lots of properties by just saving money from your job, that’s why you need to use the good debt. Getting into debt is risky, but at the same time, it’s something that requires some effort and it requires some managing. If you manage it properly, the benefits can outweigh the risk. That’s why it’s called calculated risk.
Is a car loan, in fact, good debt or bad debt? The key here is that you always ask yourself, what is it that I want to get out of it? What’s the mission of this car? put it that way. If I’m going to get into credit card debt what’s the mission of that credit card debt? What do I want it to do for me? Always ask that.
If you get a car, and then you wind up leasing it to Uber, and then Uber is paying you a certain amount of money at the end of the month for using your car, then all of a sudden, what used to be a bad debt becomes a good debt.
Now you don’t have to physically work hard in order to repay the car but you’re letting other sources like Turo, like Uber, help you pay for that car. That is not necessarily bad. In this case, you are getting yourself into debt. You’re getting into credit card debt, you’re getting yourself into a mortgage, which is even more debt; Having your own house, and having a mortgage in your own home, it’s in fact a bad debt because if you’re living in it, that means you’re paying for it.
That means you have to work for it. What’s going to happen when you stop working, would you be able to pay for that mortgage? The answer to that will be no. Contrary to popular belief, your home it’s in fact not an asset. It’s actually a liability because you have to work for it. It’s more or less considered a bad debt unless you use that property and all of a sudden you decided to do a cash-out refi or take a HELOC and use it to invest in another property and then have that rental income money to cover the new mortgage and at the same time covered the HELOC or cover that cash-out refi that you took out in order to invest.
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