Here's a very basic conversation concerning "Good Debt" versus "Bad Debt"
Do you know if there is such a thing that is "good debt"? Years ago, I considered "good debt" to be an absurdity blue world city Islamabad location.
This good in vs. bad debt discussion pops often in conversations about real estate. Especially for investors new to the field. And, typically, understanding "good" debt has proven more challenging for females (sorry girl). It appears that women tend to be more concerned with paying the bills today for our homes and our children. Since, wouldn't the majority people in society say about the dangers of borrowing? How can we make some of it beneficial? And what is the reason?
My husband and I argued about "good debt" vs. "bad debt" for two and a quarter years before I finally got it (and by "it", I mean I finally understood his argument). I wanted no debt and was not interested in finding something called"private money lenders. Why would us want to have even more people - in addition to mortgage companies to owe money to? ?
However, in the end I came to the conclusion. "Good debt" is a real thing, and not just an oxymoron. I discovered something I did not know about - Leveraging.
Here's a definition I came across for the term "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" implies that you are able to repay the lender, but have money (money) left over for yourself. If you are able to do this only once you're doing it right, it's an amazing thing. If you repeat this ten times, it can be astonishing. If done correctly and taking on more "good debt" can increase your overall profits over time.
The truth is that not all debt, naturally can result in profits - it's not a large-screen TV or an additional car, but investment debt done right definitely can. This is a basic way of thinking about it:
Let's say you own $100,000 in cash. You can buy a home for $100,000 and pay $1000 per month rent for it.
For example, you purchase 10 houses worth $100,000, paying the sum of $10,000 down and receive 1,000 per month of rent from each house. Yes, you'll be obligated to pay the loanee on each one, but you also have profits left to you on each.
- You'll only need a profit of $100 left to earn your $1000 monthly revenue.
- You also have someone else who is paying the mortgages.
- Plus, you receive tax deductions for the interest you pay to your lender.
- Tax write-offs can be added on the depreciation on those properties.
- As time passes the tenants, not you, pay off the mortgages.
- You end up with 10 houses that each pay $1000 per month for rent. Instead of the initial house that paid $1000 and 10 houses each paying $1000. Yet, you only shelled the initial $100,000 10 times the money.
This is leveraging!
Another key aspect when you purchase real property is that you will have an asset in exchange for your debt. It's not like borrowing for the latest TV or to purchase a car in which the purchase is of little to no value. In fact, those aren't assets, but obligations. With real estate, if circumstances turn out to be unsatisfactory then you can choose to give the asset to the lender to settle the debt. A much safer deal for everyone.
Begin to see this "good" debt is as an investment for your future. The important thing is to buy the right product. Make sure you buy at a significant discount, never pay full retail. This allows you to have enough the possibility of retaining value even if the market and property value decrease (remember 2008, 2009 and 2010? ).