How Debt Builds Real Estate Wealth - By: Kalinda Rose Stevenson, PhD, Posted on: 2007-08-21

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.

This is not the way that the most creative real estate investors think about debt. They regard debt as an investor's best friend.

Good debt allows you to take advantage of "other's people's money," known as OPM.

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.

With a lever, you can move something you could not move without it. The lever means that you don't need as much strength to move the object as you would need without the lever.

This concept from physics is relevant to borrowed money. You can use someone else's money as a lever to accomplish a bigger task than you could accomplish with your own money.

The reality is that someone always has the money you need to buy investment property. If you don't have it, you can borrow OPM to buy property you could not afford to buy with your own money.

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.

The essence of consumer debt is that you borrow money for something that will not create profit. For example, if you borrow $3000 to buy a plasma TV, you have created a bad debt. The TV will not create profit for you. It is a bad debt because it will simply cost you money.

Consumer debt does not give you leverage. It is not a tool you can use to create wealth. This is why consumer debt 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.

Some of the biggest debtors on the planet are people like Donald Trump. Donald Trump owes fantastic amounts of money. He's in debt, but he leverages the debt to build his skyscrapers.

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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