The savviest real estate investors know the difference between good debt and bad debt.

Consumers are taught that all debt is bad. The ideal consumer goal is to be debt free.

Unlike this consumer ideal of being debt free, the most knowledgeable real estate investors welcome debt. They consider that debt can be a real estate investor's best friend.

This type of good debt has its own name. It is called "OPM." When you take on good debt, you can use "other's people's money."

Another word for good debt is "leverage." In physics, a lever is something that allows you to move something else. If you stick a rod under a rock, and then push down on the lever, you can move the rock.

If you have to rely on your own strength, you are limited in what you can do. A lever allows you to move what you could not move without it.

Leverage also works with borrowed money. When you use someone else's money to accomplish what you could not accomplish without it, debt becomes a lever. This leverage allows you to use somebody else's money for your own purposes.

The reality is that someone always has the money you need to buy investment property. If you don't have it, you can borrow OPM to buy property you could not afford to buy with your own money.

This is an example of good debt. You use borrowed money to create wealth. Debt is a tool you can use to buy what you could not buy with your own money. If the investment creates profit, you create profit from the leverage of good debt.

The essence of consumer debt is that you borrow money for something that will not create profit. For example, if you borrow $3000 to buy a plasma TV, you have created a bad debt. The TV will not create profit for you. It is a bad debt because it will simply cost you money.

Consumer debt often has no leverage. If the debt is not a tool to create wealth, it is bad debt.

The critical distinction between good debt and bad debt is whether or not the debt is a tool to create more money. If you borrow the $3000 and use it as a tool to create profit, this is the definition of good debt.

If you want an example of using debt to create wealth, consider Donald Trump. He carries tremendous debt, which he leverages to build properties that in turn create even more wealth. Some of the richest people on the planet have the greatest amount of debt.

If you want to create wealth, the fastest method is to use borrowed money to do it. You might prefer to talk about using leverage and OPM, but in reality, these are simply another way to refer to good debt.

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Article Source: http://www.therealarticles.com

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