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How Debt Builds Real Estate Wealth

The savviest real estate investors know the difference between good debt and bad debt.

Most advice to consumers agrees that the ideal situation is to be debt free. Most consumer education treats all debt as bad.

This is not the way that the most creative real estate investors think about debt. They regard debt as an 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.

Another word for good debt is "leverage." In physics, a lever is something that allows you to move something else. If you stick a rod under a rock, and then push down on the lever, you can move the rock.

If you have to rely on your own strength, you are limited in what you can do. A lever allows you to move what you could not move without it.

This concept from physics is relevant to borrowed money. You can use someone else's money as a lever to accomplish a bigger task than you could accomplish with your own money.

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.

The critical distinction between good debt and bad debt is whether or not the debt is a tool to create more money. If you borrow the $3000 and use it as a tool to create profit, 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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