Good Debt and Bad Debt Most people are afraid of debt. Most people have experienced debt or currently have some debt. There are two kinds of debt: Good Debt and Bad Debt. When people think of debt they are usually thinking of bad debt. Bad debt is the kind of debt you get by purchasing consumer goods that depreciate and that don’t provide any kind of financial return. For example, your car, your trips, furniture, clothes, etc. Usually this debt starts as credit card debt or consumer loans. This debt has a very high interest rate and can take a long time to pay off. You should never borrow for consumer products. Save first and then purchase what you want or need. Good debt, on the other hand, is debt that is used to acquire an investment. For example, you can borrow money from a bank to purchase a rental property, or from investors to acquire a Lease Option, or even take out a loan to invest in a higher return mortgage. As long as you are getting a positive cash flow then it is good debt (no, your boat or jewellery is not considered an investment). If your investment also appreciates, that is a bonus. It amazes me that people are afraid to take on this debt because they are afraid that they might get stuck with the monthly payments. For example, if the rental unit is empty, how do they make their monthly mortgage, insurance and tax payments? Property planning and vacancy reserves will fix that. Yet somehow these same people are OK purchasing a new stereo on credit and making the monthly payments because they don’t have the money to pay off the balance every month. Because people have had so many bad experiences with bad debt, they are very hesitant on taking on any good debt. I see this everyday with people who own their own home and have their home completely paid off. They are proud of the fact that they are mortgage free. They are sitting on this big pool of dead equity that isn’t earning them anything except for the appreciation, and that only helps them if they sell. If they were to take out a mortgage on their home for let’s say 3% (today’s rate) and invest it in high ratio mortgages at say 13% (average returns I guarantee my investors) they would make a 10% profit. If their house is worth $300K and they took out an 80% mortgage, they would have $240K to invest. At 10% that would be approximately $24K extra income per year. Not bad for just refinancing you home. Rich people aren’t rich because they make more money. Rich people are rich because they know how to manage their money. Happy Investing Jim Pellerin
Investor, Advisor, Speaker, Coach, Writer
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