Debt Is Good:

Many financial advisors agree that debt is something to be avoided. Usually the experts advise you to cut up your credit cards, only use credit to buy a house and pay that off early. There are good reasons for the experts to line up on the side of no debt. A heavy load of debt will keep you from taking advantage of financial opportunities, can be emotionally draining and could result in liquidation of your assets. That's bad. But zero debt will guarantee you stay poor. Let's compare two alternatives:

Alternative 1

Buy a $100,000 apartment building with cash. Net operating income is $6,000/year. Depreciation would be $2,666. Income taxes would be about $1,000 depending on other income and active/passive status. You get to keep $5,000. With $3,000 appreciation your return on investment is 8.0%. Not bad.

Alternative 2

Buy a $500,000 apartment building with a $400,000 mortgage. Net operating income is $30,000/year. Depreciation would be $13,333 Mortgage Payment is $25,000 Income taxes $0. With $15,000 appreciation your return on investment is 15%. Thats better.

We are investors in Real Estate. Given the results above and the fact that early in our lives we had very little to invest we have depeended heavily on mortgages. Today we pay interest to banks for those mortgages. Learn how we can pay you 4% interest instead.

Debt is necessary to allow you to purchase expensive assets and has the added benefit of reducing taxes due to tax deductible interest. Debt motivates you to work hard to keep income rolling in and expenses down. Debt ultimately magnifies the returns on investment.

Perhaps debt should only be used when it results in an improved income. But that would mean no car loans, no home mortgages and no credit cards. Sounds like a good rule but here are the exceptions:

Car: A car loan may be at a lower interest but it is not usually tax deductible. First, have the cash to buy the vehicle. Then, either pay cash for the car or pay off the business loan which ever one gives you the better return. For example, a 5% interest business loan that is tax deductible is equivalent to a 3.6% interest non tax deductible car loan if you are in the 28% tax bracket. Always watch out for fees.

Credit Cards: We use credit cards for most every purchase. The credit card captures every expense making the year end 136 page tax return possible. Every month we pay off the card. If you cannot pay off the card every month you will dig yourself into a difficult financial hole. What about credit card offers? We get credit card balance transfer offers in the mail about 10 times/month. Some of them are very good with 1.8% transfer fee and 0% interest. In this case we paid off several small mortgages. Be careful because credit card payments are higher than mortgages and high balances will lower your credit score.

Home: It is better to own than to rent. Rent always increases while mortgages tend to stay the same. Most homes are easy to sell. The government makes it cheap and easy to get a loan on a home. Homes appreciate due to inflation but the land under your home gets an extra bump due to population increasees. Moving is expensive, buying and selling homes is expensive so buy a home to meet your future needs and stay there a long time. Watch out for capital gains. Under current law, once your house appreciates $500,000, you will owe capital gains when sold.