008:  Actually, Best is a Good Thing

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“Rich people use debt to leverage investments and grow cash flows. Poor people use debt to buy things that make rich people richer,”― Grant Cardon

“Once again, the 90/10 rule of money applies – 10% of the borrowers in the world use debt to get richer – 90% use debt to get poorer.”― Robert Kiyosaki

Are you starting to see a theme here⁉️ Today’s topic is all about debt and we’re gonna blow some of your minds here, there is such a thing as a good kind of debt. 

Take a second to think of the word debt and what resonates with you.

Do you feel a weight?

Does something icky stir within you?

Are you thinking of all your piling student loans or all the credit cards you maxed out?

Debt usually comes with a lot of negative connotations around it. Such as encouraging you to spend more than what you actually have, debt costing money, and debt keeping you from reaching your financial goals. 🙌

With this kind of messaging, it can be hard to think of debt as anything but negative and to avoid it as well as you avoid your boss on a Friday afternoon. But, as usual, we’re here to burst your bubble just a little about what you think you know about finances. I mean, it’s pretty on-brand for us to disrupt people’s thinking about how to make money.

Debt can actually be a good thing, and while we know that sounds crazy, debt can actually be a positive thing and help you secure everything from a mortgage to owning real estate by using leverage.

Now, you’re going to be hearing the term “leverage” a lot on this episode so we’re going to break it down for ya. Leverage is a term borrowed from engineering. In simplified terms, leverage makes it possible to move a huge load with much less effort. Like when you see a mechanical setup, such as a crowbar, lifting huge loads of cement and wood at a construction site. A tiny effort can move anything if it gets a big enough leverage. Debt is the crowbar in this case.

We’re here to help you understand why debt can actually be a good thing.  ✨

We’re like the myth-busters but with money and better style. Leveraging debt has proven to be something we could use to our advantage and it’s one of the reasons we grew rapidly when we started investing in apartment syndication. 

We’ve used debt as leverage since our first investment, which was a single-family house rental. Instead of paying the entire purchase price, we leveraged debt to finance the rental, meaning we paid it off incrementally over a series of a few years. Instead of having just invested into one home, using debt as our leverage, we were able to have multi rentals, all having positive cash flow.

Good debt vs. bad debt

Okay so let’s break it down into some real, tangible advice. What’s the difference between “good” debt and “bad” debt?

Good debt may be considered an investment vs. bad debt which is not considered an investment. Good debt is also used to finance things that will increase in value (see again, our first property investment of the single-family home) vs. bad debt which is used to finance things that can be consumed. 

Believe it or not, some of your debt can actually be seen as an investment. Enter record scratch moment here. Basically, the rule of the thumb is this: taking on good debt will help you.  In the long run, purchasing something that will increase in value and add to your financial health and bad debt is purchasing things that will just be easily consumed and gone within a matter of months, nothing really sustainable. 

Like when you eat a bag of chips for dinner and trick yourself into feeling your full only to make that walk of shame back into the kitchen at midnight heating up a quesadilla. Satisfying at the moment but not enough to actually be full. 😵😵

Another example of good debt that you may not know and already have is a mortgage. With a mortgage, you build equity in your home, and the money you pay toward the home can be seen as an investment.

Many people view renting an apartment as just throwing money away, whereas you build equity when you purchase a home. It’s not a secret that purchasing property is one of the best ways to build financial freedom and equity. 

When it comes to credit card debt, we know this can be a sore subject for a lot of people. This is often considered bad debt because of the nature of items that credit cards are used to purchase.

Things that are easily consumable, like clothes and food. You really shouldn’t use a credit card to purchase those types of items unless it’s intentional and to earn rewards knowing you can pay off the balance by the due date. 

Yep, you know we are about to break down the reasons how the rich get richer and that’s by leveraging debt. Here are 5 reasons why they do it. 💪

No. 1 The dollar loses its value

The year is 1971 and President Richard Nixon takes the US dollar off of the gold standard. This means the dollar is no longer a gold certificate. ✨ This also means the US can print as many US dollars as possible to navigate any sort of financial situation. So don’t let those stock market bros on Twitter tell you any different. 

And as we all know, the US has found itself in a lot of financial sticky situations. So when the economy is in trouble, the banks look to the Federal Reserve and the Federal Reserve has to have the backs of the banks and the banks have the backs of the rich. The banks are tied to the rich not because they are biased but because only the rich have proved creditworthiness to have such a massive impact. The rich affect the banks. 

So now that the dollar isn’t backed by gold, it ceases in value. 👀 It’s the equivalent of saving and hoarding doll money. However, it’s still a good practice to borrow it because as the value decreases what you end up paying will be less relatively speaking to other assets and commodities.

And as we also know, the US tends to have major influence internationally. Globally speaking, other currencies are based on value according to the US dollar. And if the US dollar is now a certificate of debt, so are all other currencies. 

It’s been said that orange is the new black and in this economy, debt is now the new money. Government debt is called bonds, and in a healthy economy, it makes more sense to own bonds than to own cash. If the government raises money by issuing bonds, why should the rich not use debt? You’re really just working with what is currently happening in the economy.

No. 2 Good debt is cheap

The second reason the rich use debt is because debt is cheap. Think of banks and their relationships to loans like that girl from high school that hits you up in your DM’s looking for someone to grow with her team of #bossbabes and #momagers. 😎😎

They’re trying to get people to sign up for their product and join their team so they reach a certain quota. And hey, if that’s you right now, no shame in your hustle you’re just doing what has proven to work in the past. The same goes for banks, they have a quota with how many loans they must give out each year.

And because they are the primary way banks make money, the interest in these loans is their profit. AKA the more people sign up for loans, the more opportunities for certain people to not pay back their loans and rake in those interest fees. 

This makes banks more willing to give people who want loans since they’re feeling the pressure of making money.

Of course, banks do turn down loans to unqualified people but their favorite way to make their money is to run towards qualified people. And those people are the rich. They offer loans at a way cheaper rate to the rich, and the bigger the loan, the cheaper the rate.

So, why use your own wealth on your latest business venture when you can get the money at a cheap rate from a bank? Are you starting to see it? It’s cheaper to use debt than you’re own money. 😵😵

No. 3 Debt is less risky

As we enter the third reason why the rich use debt because it’s less risky, think back to when you were first learning to drive. When you were younger you were probably learning to drive in your parent’s car and as you got more comfortable and started picking up your friends you really didn’t care about the car itself just that you could have a little freedom for once in your young life. 🙌

Then, as you got older and started paying for your own car, your own gas, and your own insurance you started to realize something: this stuff is expensive and it’s coming out of your pocket. 

When it comes to debt and investing, this can seem like a risky business. When using your own personal wealth for any project, you are going to be considerate and try to be as economic as possible, like when you started buying things for your own car.

The consequence of that is neglecting some things to save money that may come back to haunt later. Like you may try to go cheap on the insurance and the very event that wasn’t covered happens. However, when you spend the bank’s money, you have no reason to hold back— it’s someone else’s money! Everything is already factored into the loan. Using debt for the business venture is way less risky.

And in the worst-case scenario, if this business fails you have a built-in scapegoat— the fault is on the corporate entity and not on you! If the company is well structured, the individual is in less trouble than if the business was financed by personal fortune. That’s why when these big businesses file for bankruptcy, their founder and executives will still be boohooing in Santorini. 

No. 4 Debt gives you leverage

The fourth reason the wealthy use debt goes back to the leverage thing.  ☺️☺️ Again, when we mention leverage we’re not talking about some blackmail, back alley type of situation where you’re holding something over someone’s head. We’ve watched too much true crime. 

Debt is leverage in the financial world. With your own personal wealth, you can double or triple what you have. But if you use debt, then the insane multiples become possible. You can do 25X, 100X, 500X more. It’s about moving huge amounts of money with less effort. Debt is what the whole stock market is based on. Did you actually think they had that much in the bank? Not in this economy‼️ 

Of course, when things look shaky in the stock business, failure can be devastating. In other less risky investments, (like with apartment syndication hint hint!) debt gives decent leverage.

The best leverage is on a business where the financial outcome is based on skills and competence. That way you’re not leaving it up God knows what else will be thrown at this world leaving the stocks and the economy on edge. I mean, we’ve already lived through a global pandemic, a recession, and too many natural disasters to even count. Do us a favor and don’t ask how much we spend on therapy.

No. 5 You get to keep the money, honey

And reason number five the wealthy use debt, they get to keep their own money. Imagine if you got to keep your wealth in an asset yielding 15% per year. Why would you take it out so you can finance another venture that will yield almost the same rate? The rich take on debt based on the asset that is producing income year after year. Then the second asset can grow without touching the first asset because of the use of debt.

The top reason rich business people use debt to finance their next business venture is that they get to keep all their previous ones up and functioning. They can build a second and a third business without touching funds from the first business. It sounds kind of ridiculous but in some ways, this is the closest thing to actually playing with Monopoly money in real-life situations. Purchase Broadway while 42nd street is thriving and not having to pull from those funds? Sure! Why not‼️

And of course, for us, our favorite way of making money is through apartment syndication. We love leveraging debt to finance our other apartment buildings. It’s the only way for the business to grow at a rapid rate. 

We’ll close out this episode with a story. On our recent apartment syndication investment, the purchase price of the building is $32.4m, the loan amount is $27.68m. Way too much to purchase with our own money. 

Prior to closing, the value of the property shot up by $5.4m but the debt for $27.8m stayed the same, the loan/debt amount didn’t go up even though the value of the apartment had.

Most of our apartment syndication loans are interest only, which means instead of paying down the principal, (the principal is the money you originally agreed to pay back) the income flows to our passive investors because we are only paying the interest. Therefore, our loans 👉 are non-recourse loans, meaning the apartment building itself is the collateral, not our personal assets.

Unlike single-family homes, where you as an investor have to sign on the loan, to benefit from the income, in apartment syndication, passive investors don’t have to get their credit pulled and don’t have to sign on any loan.

We paid a small portion of the building but we get the benefits of owning the entire building, including the massive tax benefits. Debt is good when it’s done on the income-producing asset that covers more than just the mortgage payment. It’s also able to fund the lifestyle you deserve and secure financial freedom. 

If there are some new topics we introduced you to today, check out this free download for the apartment syndication survival guide.

 

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