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How Debt Builds Real Estate Wealth

The savviest real estate investors know 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.

Unlike this consumer ideal of being debt free, the most knowledgeable real estate investors welcome debt. They consider that debt can be a real estate investor's best friend.

The reason for this is OPM. OPM is a short-hand way to refer to "Other People's Money." OPM is just another term for good debt.

In addition to OPM, another way that investors talk about using borrowed money is the word, "leverage." Consider using a crowbar to move a heavy object. The crowbar allows you to move the heavy object. Good debt is an example of leverage.

Levers allow you to move something that you couldn't move if you tried to pick it up with brute strength.

When you borrow money, you create a type of leverage. You can use someone else's money as a lever to accomplish what you could not do with your own money. This type of debt is a powerful tool. You are using someone else's money for your own purposes.

Consider a situation when you don't have enough of your own money to buy an investment property. When you treat borrowed money as a lever, you can use the borrowed money to buy the property you could not afford with your own money. This is the power of leverage.

Good debt allows you create profit. It gives you a tool to buy an investment property you could not buy with your own money. Profit from the investment property turns into your wealth created by debt.

Compare good debt with bad debt. Consumer debt means going into debt for something that won't bring you profit. If you charge $3000 for a plasma TV, you have created bad debt. The TV is not going to bring you profit. It is going to cost you money.

Consumer debt often has no leverage. If the debt is not a tool to create wealth, it is bad debt.

When you borrow the same $3000 to invest in property that leads to profit, debt is a tool to create wealth. This is the definition of 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.

Whether you call it leverage, or OPM, good debt is one of the fastest means to creating wealth.

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