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The most successful real estate investors understand the difference between good debt and bad debt. Most advice to consumers agrees that the ideal situation is to be debt free. Most consumer education treats all debt as bad. 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. 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. If you have to rely on your own strength, you are limited in what you can do. A lever allows you to move what you could not move without it. 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. 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. 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. 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. Consumer debt often has no leverage. If the debt is not 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. If you want an example of using debt to create wealth, consider Donald Trump. He carries tremendous debt, which he leverages to build properties that in turn create even more wealth. Some of the richest people on the planet have the greatest amount of debt. Whether you call it leverage, or OPM, good debt is one of the fastest means to creating wealth.
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