How do you use debt to build wealth? (In a Safe Way)

Debt is bad! Or is it…

Conventional personal finance would have you believe that any and all debt is terrible. Just ask any popular personal finance guru and they’ll tell you that debt is good for absolutely nothing. All forms of debt are pure evil.

While consumer debt is terrible for your long term financial well-being, that doesn’t mean that all kinds of debt are bad for you. In fact, taking on some debt and getting some loans can help you build wealth much faster than you would be able to otherwise.

Here are two relatively safe ways that you can use debt to build your wealth.

You can use debt to invest in real estate.

Most people already have a mortgage that they pay every month for their own physical residence. Some people also take out mortgages to invest in real estate to steadily grow their wealth. You could become one of those people.

If you take the time to learn about how the property market works and how to buy properties around you with the least amount of risk possible, it might be a good idea to take on some debt to invest in real estate.

You need to learn about things like city or location selection, affordability among locals as well as local supply and demand to do well in real estate.

There are a ton of resources out there to help teach you about the ins-and-outs of real estate investing. A bunch of those resources are available for free but it might be worth it for you to buy some books on the topic or take a course in real estate investment.

Watch out for those real estate seminars that charge ridiculous prices though!

  • Take out a loan to buy properties to flip.

The first way you can use debt to invest in real estate is by house flipping. House flipping is when you buy an undervalued property and then quickly sell it for a profit.

House flippers need a vast amount of knowledge on real estate valuation, marketing as well as building renovations in order to be successful.

While you can just buy and flip a property without ever touching it, it’s much more popular to buy a property and renovate it to raise its value. This is the safer option since there’s more room for profit by doing renovations yourself or by hiring a reasonably priced contractor rather than buying a property then immediately flipping it.

The main advantages of house flipping are that your capital is ideally only tied up for a short amount of time and your return on investment comes in quickly.

If you know what you’re doing, it’s not uncommon for house flippers to flip more than 10 properties a year.

The disadvantages of house flipping are the fact you need a huge amount of housing market knowledge and you run the risk of hot housing markets cooling down suddenly.

Also, if you make a bad choice on a property, you’re either stuck with it for a long time or you’re forced to sell it at a loss.

  • Buy rental properties using loans.

You can also invest in real estate by buying rental properties.

Buying apartments that you rent out is also another way that you can use debt to build your wealth. Owning rental properties is best for people who are great at handling things themselves and are investing for the long term.

The main advantage of renting out your properties rather than just flipping them is that you have positive cash flow from collecting rent.

This means you maximize your profits since you’re collecting rent while your property goes up in price and can potentially be flipped for a handsome profit. Another upside of owning rental properties is that most places offer a lot of tax benefits if you own a rental property.

The main disadvantage of investing in rental properties is that managing your tenants is troublesome since they can cause damage to your property and collecting rent can be difficult depending on your tenants.

There’s also the risk that your rental property might be vacant for some time and your positive cash flow stops.

  • Own pseudo-hotels by taking out loans to buy AirBNB properties.

The last thing we’re going to talk about is AirBNB. Buying properties to be used for AirBNB is pretty similar to buying rental properties but it’s unique in its own ways. Think of investing in AirBNB properties as a cross between owning a rental property and a hotel.

If you don’t know what AirBNB is, it’s an online marketplace that lets property owners rent out their properties or even their rooms for short periods of time.

It’s an easy way for people who don’t need to rent an apartment for a long time to get away from spending too much money on hotels. It’s also a great opportunity to help people like you make some extra cash from your properties.

The main advantage of investing in AirBNB properties is that they usually offer faster turnaround and greater cash flow for owners.

The main disadvantage of owning AirBNB properties is that you have to deal with a lot of customers and some of them are bound to cause you problems.

To end this section, it should be pointed out that real estate is considered a relatively safe investment because property values have always gone up over long periods of time. However, that doesn’t mean they always go up no matter what.
Housing bubbles are a thing that can make even the toughest real estate investors sweat hard and many people have gone bankrupt because of them.

If you choose to take out loans to invest in real estate, you need to avoid being reckless and you need to think things through carefully.

You can start and grow a business by taking out business loans.

We’d like to reiterate that you can absolutely start a business without going into debt. However, that doesn’t mean that there aren’t any advantages to taking out business loans when it comes to building a business.  

While you can start many kinds of online businesses for almost no cost, if you want to start a business that requires a physical location, you’ll need capital. You can get this capital by slowly saving your money or by taking out a loan. If you know what you’re doing and want to get started fast, taking a business loan might be your best bet. 

As a quick example, if you think you can open a successful restaurant, you’ll probably need a business loan to pay for your location and all the renovations that you’d need to do to turn that location into a usable restaurant.

Starting a business with business loans is risky even if you think you know what you’re doing. However, there’s a safer way to use business loans.

You can take out business loans to scale up an already successful business. Let’s say you bootstrapped a business and it now has a track record of doing well. A smart thing to do would be to reinvest your profits into the business but you can also take on a bit of debt to scale that business hard.  

A good example is if you’re running a product business that targets consumers directly. In this case, let’s say you own a watch company that is always sold out on all your kinds of watches. You can take a business loan to produce more watches to keep up with your customers’ demands.

Here’s a quick summary of how business loans normally work.

Business loans are usually offered by bigger sized banks.

They give you a lump sum of money to use on your business and you make regular monthly payments with interest until that debt is paid off. The bank that lends you this money doesn’t have any control over how you run your business and doesn’t take any ownership of your business.

Business loans like this offer two unique advantages.

Once you pay off your business loan, your relationship with the bank ends and they will have no stake in your business at all. Another one is that while you need to pay interest on these kinds of business loans, you can usually count this interest as a business expense and use it for a tax deduction.

Gentle Reminder: Consumer debt is still absolutely terrible for you.

The point of this article was to help teach you that some forms of debt can benefit you if you use them properly.

So it’s worth it to remind you that consumer debt is still a bad thing. Going into debt because you want some fancy, shiny new toys that you don’t really need is a dumb idea. 

Here are some reasons why consumer debt is terrible for you:

  1. Consumer debt can hurt your credit score and prevent you from owning property. If you take on too much bad debt and can’t pay it back, it’ll affect your credit score. This will absolutely prevent you from taking out loans in order to invest in real estate.
  2. Consumer debt will prevent you from building wealth and reaching your financial goals. It’ll be very hard for you to get rich if all your money is being used to pay off your debt on things like cars and clothes. Learning to avoid taking on consumer debt will directly aid you in building your fortune.
  3. Consumer debt can hurt your personal relationships. Did you know the number one reason for divorce is money troubles? It’s not just marriages that are affected by bad debt either, all your other relationships can suffer as well!
  4. Consumer debt can stress you out and lead to health problems. Thinking about all the bad debt and money you owe will stress you out. This excess stress is bad for your health, ages you and can directly cause heart problems if you let it get too bad.
  5. Consumer debt can cause you to go broke fast. Most consumer debt is caused by buying things with credit cards that charge a lot of interest which will just keep growing and growing with time. Many people go bankrupt because of this and you wouldn’t want to be one of these people!

Closing

We hope that you understand that going into debt for things like clothes, watches and fancy cars is a bad idea.

However, if you’re cautious and can carefully plan ahead, debt can be used to efficiently build your wealth. Bootstrapping your way to wealth is always going to be safer than making use of loans… but if you know what you’re doing, taking on some debt can help you make money much faster.

Hopefully this article helped to clear up some doubts and misconceptions that you had about taking on debt.

Whether you choose to take on some debt to invest in real estate or to run a business, good luck! And if you choose to do neither, no hard feelings!

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