Good debt vs Bad debt
Is there even such a thing called “Good debt”? Isn’t having any debt a bad thing? How can debt be good? Interesting thought …
Well, to start things off, let me clarify the different types of debt we all have. Consumer debts which are debts that we incur for purchases for our own entertainment and pleasure such as car loans and credit card debts. These are considered bad debts because you are the one who has to make the monthly payments out of your own pocket (or someone who loves you does). You need to use your hard earned money to service it. Good debts, on the other hand, puts money back into your pocket!
What do I mean by putting money back into my own pocket? I mean you get PAID to borrow the money. That’s right! This is the power of having good debts. Wait a minute, how is this possible?
Well, let’s look at an example, you borrow a $30,000 line of credit from the bank for 5% a year in interest and you lend out that money on a secured 2nd mortgage at 8% … so technically, you make a 3% spread or $900 per year! It doesn’t stop there … that 5% interest that you had to pay for the line of credit is tax-deductible because you borrowed it to invest. Are you starting to see the picture?
The benefit of getting into good debts becomes even more evident when the return on your investment gets bigger. Let’s say you could lend it out at 10% per year … that would be an additional $600 to your $900! Now imagine your line of credit was $50,000 instead? That is what I mean by having “good debts” … you basically let your money make more money for you to spend on bad debts. How sweet!
However, do keep in mind one very important point: if the borrower doesn’t make your 2ndmortgage monthly payments on time or defaults, your good debt has just turned into bad debt at that very moment. I want to be clear that it is NOT as easy as it sounds. There is a lot of homework on the part of the investor (that means YOU) to do to make 2nd mortgage investments profitable. There will always be some level of risk involved in every type of investment strategy so it’s very important to work with a professional who can help you understand both risks and the rewards.
If you are interested in getting into some good debts and want to know how much you can borrow to invest, I would love to give you a free consultation session! So, next time your significant other nags you in getting them a new phone or gadget, you don’t have to wait until your next pay check any more!