Here’s a very basic conversation about “Good Debt” versus “Bad Debt”
Is there such a thing as “good debt”? Years ago, I considered “good debt” to be an oxymoron.
This good vs. bad debt conversation comes up a lot in real estate conversations. Especially for investors just starting out. And, typically, understanding “good” debt has proven more difficult for women (sorry girls). We, it seems, are much more concerned about paying the bills today for our home and our children. After all, doesn’t most of society tell us that debt is bad? So, how is some of it good? And why?
My husband and I argued about “good debt” vs. “bad debt” for two and a half years before I finally got it (and by “it”, I mean I finally understood his argument). I wanted no debt and was absolutely NOT interested in finding something called private money lenders. Why in the world would we want even MORE people – besides mortgage companies – to owe money to?!?
But, ultimately, I became convinced. “Good debt” is a real thing, and not just an oxymoron. I learned about something I had not previously understood – Leveraging.
Here’s one definition I found for leveraging: “using borrowed capital for (an investment), expecting the profits made to be greater than the interest payable.”
Yes, “profits made to be greater than the interest payable” means you can pay back the lender and still have profits (money) left for yourself. If you do this once, it’s a wonderful thing. If you do this ten times, it can be incredible. So, done right, taking on more “good debt” can increase your own long-term profits.
Not all debt, naturally, leads to profits – not a big screen TV or another car, but investment debt done right definitely can. Here’s a very basic way to look at it:
Say you personally have $100,000 cash. You can purchase one house for $100,000 and get $1000 per month rent for it.