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. In contrast, the most successful real estate investors know that debt is an investor's best friend. Why? This type of good debt has its own name. It is called "OPM." When you take on good debt, you can use "other's people's money." 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. Leverage also works with borrowed money. When you use someone else's money to accomplish what you could not accomplish without it, debt becomes a lever. This leverage allows you to use somebody 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. This is an example of good debt. You use borrowed money to create wealth. Debt is a tool you can use to buy what you could not buy with your own money. If the investment creates profit, you create profit from the leverage of good debt. This is not what happens when you take on consumer debt. If you buy an item, such as a plasma TV for $3000, you have taken on bad debt. The TV costs you money. It does not become a means to create profit. This is the difference between good debt and bad debt. In other words, consumer debt produces no leverage. It doesn't provide 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. Debt is the primary wealth-building tool of some of the richest people in the world. Donald Trump is an example of someone who knows how to leverage debt to create even more wealth. He uses borrowed money to acquire and build even more properties. This means that good debt is one of the fastest routes to creating wealth. You can call it leverage or OPM if you want, but these terms mean the same thing. You are using borrowed money to make money.
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The savviest real estate investors know the difference between good debt and bad debt.
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