How to Make Money w Good Debt Versus Bad Debt
So, what’s the difference between so-called “good” and “bad” debt? There’s certainly a distinction between the two.
In fact, using good debt to invest in real estate is exactly how I became wealthy in the real estate investing.
And, I’m going to teach you how you can invest in real estate too!
I want to show you just how to invest in rental real estate properties, so you never have to work a 9-5 job ever again.
The Debt Debate & Where I First Learned About It
What is it that makes any sort of debt good, or conversely, bad?
A long time ago, I read a book that specifically covered what determines debt as either good or bad. Before that book, I had no idea that any sort of debt could be good. I had always assumed that all debt was bad.
Because when you go into debt, you have to pay initial interest, and then even more interest on top of that if you can’t pay it off the first time around.
No matter what you’re borrowing money for—whether a credit card, or to buy a house, car, or boat—by borrowing any money at all, you’re going into debt as a result.
The book that I’m talking about is Rich Dad, Poor Dad by Robert Kiyosaki.
The reason I love this book so much is not only because it completely changed the way I now think about debt, but also because it taught me how to make money the right way.
To overview, here are some of those money-making lessons that I took away from the book and now use in my own investment processes.
How To Make Passive Income in Cash Flow
Instead of working for somebody else and earning a set hourly payment per every hour that I work, I now make money through passive income.
By earning passive income, I only have to work one time by investing in one piece of real estate.
And it’s that one property purchase that makes me at least 250 dollars a month entirely on its own.
With passive income, there’s no work on my part and I still make money. It’s hands-off cash flow!
How To Grow and Scale the Business
The second thing I learned from the book is about utilizing good debt to grow and scale my business. Here’s where it becomes especially important to understand the true difference between bad and good debt.
If you’ve ever listened to Dave Ramsey or any other public personality that talks about getting out of debt (which I don’t mean to negate—their messages are valid!), I have a “Destroy Your Debt” video that actually walks you through how to get out of credit card debt.
In that video, I talk about using the Snowball Method and also show you how to increase your credit score by 100 points within a month’s time.
I have several other videos covering similar debt diminishing topics on my channel as well. Just hop over to my YouTube to see for yourself.
What is Bad Debt?
Bad debt takes money directly out of your pocket.
Say, for example, you buy a car to get back and forth from work, and to buy that car you take out a loan. You’ve borrowed $10,000 so you need to eventually pay $10,000 back.
But in addition to that sum of money you borrowed, you need to also pay interest. Think of interest as essentially the cost of the privilege of lending money from the bank.
Bad debt is when all the money you have is going toward both the principal, or how much you borrowed, as well as the interest you’ve accumulated by borrowing.
What is Good Debt?
Good debt is awesome! In fact, I’ve utilized good debt so religiously in my business, that I’m going to give you an overview as to how I use good debt to grow my business and to buy more real estate.
It’s because of good debt that I have more than 30 properties now. Each of these properties brings me $250 or more of passive income each on a monthly basis.
I even have a free real estate investing course readily available to you because I just want to get you started! In this course, I will show you how to find properties, how to fund and make money for these properties, how to have other people manage it all, and how to grow your property investment business to the point where you’ll never have to work a job again.
But back to good debt…
Good debt puts money into your pocket.
Remember, bad debt takes money out, and so therefore good debt does the opposite. Again, if you buy a car that costs you money every single month and doesn’t make you money simultaneously—that’s bad debt.
But let’s say you buy a car, and you decide to rent it out to somebody else. If your initial monthly payments are around 400 dollars, but you’re renting it out for 800 dollars total, that’s 400 dollars in passive income right there.
This is a prime example of passive income of course, but it’s also precisely what good debt is.
By taking on the 400 dollars’ worth of debt, but all the while making 800 dollars in passive income, that money is flying into your pocket while also pulling you out of debt.
Pro Tip #1: Cash Out & Refinance to Buy Rentals (Advanced Strategy)
As another example of how good debt works, I’ll let you in on a method that has worked for me over and over without fail. I once bought real estate with $17,000 down, and then I kept buying more and more properties after that. And here’s how.
I live in my own single-family home, and I know there’s equity in this single-family home because its market value is far higher than what I currently owe on it.
Pay close attention here, because what I do next is an advanced strategy that I teach all of my students: because of that equity, I refinance this property by pulling out the current equity amount and then use that money to purchase my next rental property.
While my payments on this single-family home of mine do go up, the passive income that I will then make off of that rental property that I purchased—at least $250 a month or more—is money that I can spend on another property AND cover the increase in mortgage.
So, if my mortgage went up by one-hundred dollars by refinancing and taking out equity from my personal home, I make sure the property I buy is going to account for those hundred dollars, reimburse any expenses, and put money in my pocket.
But, like I said, that’s a bit of an advanced strategy.
Good Debt Example of Renting
Let me give you another specific example of how good debt is beneficial. This method is incredibly easy and less advanced than the previous.
Let’s say you’re tired of renting, so you’ve decided to buy a house to live in with your family. Because you’re living in that house, that house is therefore not making you any money. That is bad debt.
A banker might try and tell you otherwise; that your purchase of a personal home is an asset. Or in other words, good debt. But we know that isn’t quite true based on how we look at debt.
Debt can either make you money or lose you money.
Bad debt causes us to lose money, and good debt helps us make money. It’s that simple.
That house you bought to live in is making you no money at all and is really just pulling money out of your pocket. We can be sure that’s bad debt. But let’s say you buy another house and move into that second property.
With that first house vacant, you can now rent it to a tenant. By renting to a tenant, that tenant pays for all your expenses—your mortgage, your taxes, your insurance, your property managers, etc.
By renting it out, that one house that was initially only milking you for your money is now a source of good debt because it’s putting passively earned 250 dollars or more per month straight into your wallet.
As for the second house you purchased, which your family now lives in, technically that house would be considered “bad debt,” by definition, but having a place to live is of course important too. So, it’s not all that bad of a purchase.
And after two or three years, you can potentially refinance the home you’re living in if the property value goes up. Say the value of my home increases by $30,000 after a few years of paying it off.
That’s $30,000 I can pull out to purchase another rental property (depending on how much the banks allows me to withdraw, which is usually between 75-80%).
Pro Tip #2: The Snowball Method
Now here’s the pro tip: reinvest your money back into more properties.
If you keep rolling that money that you either pull out or make back into properties, it produces a snowball effect. And as your business gets bigger, you will in turn make more money.
I’ll buy a property that makes me money, then I save the money I make to buy another property, and the cycle repeats.
It’s through that investment cycle that I’ve amassed more than 30 properties to date, which bring in enough money so that I will never need to work another day in my life.
I quit my job when I was 37 years old, and I want to show you how you can do the same.
It’s worth noting that this method of investment and understanding good debt vs. bad debt isn’t for everyone. I’d bet 90% of the population might be totally against it. But as for the other 10% made up by investors like us, we see the disparity between good and bad debt.
And then we make money off of that good debt.
When I was about to quit my job, I had plenty of good debt. But then I realized, if I paid off the mortgages that I had at the time, I would be able to bring in even more passive income. Instead of $250 a month, I’d make $500 or $600.
So, I implemented that Snowball Method. And once I got to 30 properties, I was making $20,000 a month collectively in passive income. From there, I just kept paying off mortgages.
Why would I go to the bank when I could just pay it off?
That’s precisely the beauty of using good debt to your advantage.
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