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The savviest real estate investors know the difference between good debt and bad debt. Consumers are taught that all debt is bad. The ideal 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? The reason for this is OPM. OPM is a short-hand way to refer to "Other People's Money." OPM is just another term for good debt. Another word for good debt is "leverage." In physics, a lever is something that allows you to move something else. If you stick a rod under a rock, and then push down on the lever, you can move the rock. 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. When you borrow money, you create a type of leverage. You can use someone else's money as a lever to accomplish what you could not do with your own money. This type of debt is a powerful tool. You are using someone 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. Good debt allows you create profit. It gives you a tool to buy an investment property you could not buy with your own money. Profit from the investment property turns into your wealth created by 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. In other words, consumer debt produces no leverage. It doesn't provide a tool to create wealth. It is bad debt. The critical distinction between good debt and bad debt is whether or not the debt is a tool to create more money. If you borrow the $3000 and use it as a tool to create profit, 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. Whether you call it leverage, or OPM, good debt is one of the fastest means to creating wealth.
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