What is good debt & why you want it!

What is good debt and why you want it?

Why would anyone want debt? Didn’t we grow up taught to not get into debt, that debt is bad? Well, you should know there is two different kinds of debt.

"GOOD DEBT" & "BAD DEBT"

Think of bad debt as things you use a loan to purchase that never make you money… maybe you purchase clothes at the mall on a credit card or a brand new TV for the big game on the credit card. Maybe you take out a second mortgage to put a pool in your backyard. Maybe you buy a watch and take out a small line of credit to buy that watch. These things are consumer debt or "bad debt". So much so the average American has over $90K in debt for 2021.‍

Then how is debt good? Well, what if there was a kind of debt that allowed you to improve the returns of your investment? What if with this debt you were able to use other people’s money? And also what if this same debt was paid down by someone else? Too good to be true? Well, this is known as "good debt" and it's what the wealthy and high net worth individuals use. Even business use debt to their advantage as well. This good debt is used to make more money. 

Check out the company, Apple. They have over $190B of cash on hand. READ THAT AGAIN. Apple the same company that made the iPhone you are reading this blog article on has over $190B of cash.

Guess what, they also have debt. So why wouldn’t they use the cash and still take on debt? Because Apple understands the game and plays it very well. Apple uses debt to their advantage. They borrow money and are able to gain a better position and return on their investment. 

In the world of real estate investing… debt is a tool. 

Let’s say I buy a 62 unit apartment building for $7.8M. I put down around 35% or $2.73M. I would then get a loan for the other 65% or $5.07M. I took $2.73M and bought $7.8M worth of real estate. 

Now because I bought the right property in the right location, and because I know how to exit the deal and make sure it cash flows… I am able to improve my returns. So, I don’t actually pay the monthly mortgage on the property. The property generates enough income to cover all the operating expenses and the mortgage. As you know from my previous blog, what is left over is called “CASH FLOW”. 

I used the debt to improve my returns. 

Here are my top three reasons why you would use debt on a real estate deal:

1.) The debt I borrowed isn’t mine, its someone else’s. This is where the idea of using Other People’s Money comes in. 

2.) The other 62 tenants are paying down the mortgage every month.

3.) If I bought the property cash I would not being make as good as a return as I am by leveraging the bank loan. Meaning my Cash on Cash Yield is better!

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The best investment on earth is earth!

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~ Sean