Significance Of Good And Bad Debt In Real Estate Investing

When you hear a lot of financial experts say that debt is really dumb when it comes to real estate investing, you may tend to wonder whether it is true or not. Yes, it is true that most possess this opinion that one should not borrow money in such cases except when they want to purchase their primary residence.

This is because such debts have its significant downside risks which may not only put the health of your finance in jeopardy but may even result in bankruptcy. Go through all those debt settlement and debt consolidation reviews and you will see that a fair bit of them involves such bad experiences.

This can be a very severe issue for a real estate investor. Therefore, if you are one or in the lie of thinking to become one, you must have proper knowledge about debt funds and its role and risks in real estate investing. This will help you to prevent from having a really bad experience and probably an unrecoverable financial state which is extremely relevant to all real estate investors.

Debt and cash

There are lots of people who possess a different idea and opinion about debt and cash based on their personal experience and analyzing those of the others.

  • Most financial expert will say that debt is dumb whereas cash is king.
  • Few others may say the debt can be a good thing and produce satisfactory results if you borrow only ‘good debt.’

However, most people especially the common people do not have a fair bit of knowledge about the difference between good and bad debt. This is why they find them trapped in a debt hole most of the times.

  • Typical examples of bad debts can be any credit card debts and personal loans because they do not create any wealth but instead take out money from your pocket in repaying much more than you borrow in the form of interest.
  • Good debts, on the other hand, will pay returns for themselves such as debts used to buy real estate that will produce high and steady income. That means good debts will bring in more money as compared to that it will take out from your pocket.

In short and simple terms it can be said that bad debts will make your poor and good debts will make your rich.

Choosing good debt and bad debt

Now, the main question that arises is which debt you should take when you want to invest in real estate so that you can make it a smart move for your wealth building plan. The smart answer to this for a smart people like you is to consider both as partially correct as debts can be both useful as well as dangerous. It is like a loaded gun and it all depends on how safely and securely you protect it or use it when the needs arise.

  • In real estate investing debt can be really good as it will benefit you in ways more than one. However, you will need to exercise extreme caution and care for the risks associated with borrowing money. If you do not then debt can be really dumb and make you believe that cash is the real king.
  • It is best and you will be better off if you do not carry any other personal loans apart from a house loan. This will prove to be extremely productive in terms of appreciation in the value of your wealth, tax benefits and several other ways. Yes, like most other people you may wish that the mortgage goes away soon but then if you choose to use the debt carefully you can leverage your debt in real estate investing in many different forms of leverage.

When you use debt very carefully following the conservative terms diligently, you make it useful while buying your primary residence or investing in a real estate.

  • This will help you to increase the return on your investment and at the same time will shorten the time to achieve your finance goals.
  • The most significant benefit of making a good investment in real estate is that you will be able to buy any good deal as and when it comes on your way even if you do not have enough cash in hand to strike a deal.

To ensure these all you have to do is to be careful and conservative when you acquire a debt. This will ensure that the end result is as desired and in the process you do not have to take on too many risks like most of the real estate investors do and build your complete fiscal structure on a faulty and shaky foundation.

Debt can be dumb

There may be times when debt can be dumb in real estate investing. This is because at times debt can be characteristically risky when it comes to making payments. Why? This is because you will have to continue making the payments irrespective of the fact that the real estate property is not being able to produce a steady income or no income at all.

That means if you tenants move out or your property collapses due to poor maintenance or for natural reasons it really does not matter much to the creditors. You will have to make the payments for months and years to come with no income.

Therefore, a debt can be really bad or dumb for that matter if you do not have a considerably big cash reserve. This amount should be enough to pay off the total principal amount for at least six months plus the interest for that period, taxes and insurance premiums.

It can come to huge sum for a single loan and if you have a lot of loans in your name then perhaps God can only help you out, provided He has a way out. Therefore, never let your debt to ‘balloon’ because then your creditor will be control making your debt dumb.

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