Many people look at investing as a tricky. Fact is, it’s great! Many of our most successful investors use debt to further their influence. Whether they’re buying homes or land tracts here in Murphy, real estate gives you the best returns when you use leverage.
When it comes to debt, most consumers fall into either of two camps – those who fear debt and those who embrace it. Let’s call the first group the debt-o-phobes. To these folks, debt is to be avoided at all costs. They don’t carry a credit card and refuse to buy anything, except a home perhaps, on credit. We’ll call the other group debt-thusiasts. As long as they can have whatever they want right now and can afford the monthly payments, they don’t care how much debt they are in or interest they will pay.
Neither extreme is healthy. The debt-thusiasts are constantly paying too much for goods and services, because in addition to the purchase price, they are usually paying a hefty amount in finance charges. They never get ahead and have little chance of building wealth.
The debt-o-phobes, on the other hand, can save a considerable amount of money in interest, but they have less money available to fund revenue-generating investments. Because they refuse to take on debt, the only money they have to invest is the money they have squirreled away.
What exactly is bad debt? Bad debt is money you owe on something that 1) does not increase your earning potential and 2) depreciates – decreases in value over time. Generally speaking, if you go on a spending spree with your credit card, you are taking on bad debt.
Some experts would claim that a loan taken out to purchase a new car is bad debt, because as soon as you drive the car off the lot it depreciates. While that may be true, financing the purchase of a nice car could increase your earnings potential, allowing you to drive to a workplace that offers a higher salary. A nice car could also improve the earnings potential of someone in sales who must drive clients around.
Good debt is money you owe on something that either 1) increases your earnings potential sufficiently to pay back the debt, and then some, or 2) enables you to invest in an appreciable asset – an asset whose value increases over time sufficiently to cover the debt.
Experts generally agree that a mortgage loan used to purchase a home represents good debt, because while you are paying the interest on the mortgage, your home is appreciating in excess of the percentage interest you pay. In addition, your home mortgage is tax-deductible, assuming you can and do itemize your deductions.
Most people also consider education loans to be a form of good debt, because an education generally improves your earnings potential – although that may depend on what you study in school and how much debt you graduate with.
Exchanging Bad Debt for Better Debt
Refinancing your home mortgage to pay off your credit card debt could benefit you in two ways:
• Makes the interest you are paying tax-deductible. Home mortgage interest is tax-deductible. The interest you pay on your credit card balance is not.
Caution: Consult with a trusted and qualified accountant or loan specialist before refinancing your home to pay down your credit card debt. Refinancing too often can cost you a considerable amount of money in loan origination fees and other expenses related to taking out the loan.
Investing with Other People’s Money
One of the secrets to maximizing the return on your investments is to use borrowed money (other people’s money) to finance your investments. For example, say you have $100,000 to invest in real estate, knowing that you can buy and fix up a home for $100,000 and then turn around and sell it for $120,000. If you could pull it off, you would earn a 20% profit, which isn’t bad.
That’s what you call leverage, and you gain leverage by using other people’s money.
When you are ready to begin building your own wealth in real estate, talk to your loan officer or mortgage broker about leveraging the power of other people’s money. He or she will know exactly what you’re talking about.
See more from author Ralph R. Roberts, GRI, CRS is an experienced real estate agent and investor and author of Mortgage Myths: 77 Secrets That Will Save You Thousands on Home Financing (John Wiley & Sons).
If you’re looking for an investment, now is the perfect time to contact us or start searching online. Be sure to subscribe to our blog so you can beat the street! If you’re looking to refinance and stop paying so much interest on things like credit cards, we have some of the best mortgage brokers in the industry working with us!
John and Jessica Poltrock – REMAX Mountain Properties – The POLTROCK TEAM – www.MyMurphy.com – JohnPoltrock@gmail.com – Call Toll Free (877) 837-3002 and demand the POLTROCK TEAM! to start investing successfully in real estate!