Is debt always bad? 

While there are several reasons investment real estate deserves a place in nearly anyone’s portfolio, I’d like to focus on one reason that can be misunderstood: debt. 

Most of us are conditioned to avoid debt. When we think of being a responsible member of society, it typically means we aim to live within our budget and avoid buying shiny objects or gadgets we don’t need and can’t afford by using credit cards, aka “bad debt.”

Being resourceful with our funds is terrific; however, we may want to avoid taking things to an extreme.

Though we can all agree to have a balanced budget at home is a good thing, and the “bad debt” of owing money on credit cards typically isn’t beneficial, is there such a thing as “good debt?”

Examples of Good Debt 

A mortgage is considered “good debt” for investors because it solidifies the total amount owed. We then use future dollars (which are worth less than today’s dollars) to pay off the note via the tenant’s rent.

The tenant benefits from the use of the house, and the investor benefits from cash flow and appreciation.

Below is a theoretical Rate of Return Comparison highlighting the benefits of utilizing “good debt.”

1. Larry decided to buy a mutual fund from the local broker and let a portfolio manager bet on which stocks and bonds might do well. He starts with $100,000 and, after time, ends up with $110,000 giving Larry a rate of return of 10%.
2. Mo decides to do something different and purchases an investment property for $100,000, and after a period of time the house is valued at $110,000. Down Payment + Closing Cost = $25,000. Did Mo get the same return as Larry? No, because Mo has leverage in the form of an $80,000 mortgage. $10,000 gain divided by $25,000 gives Mo a rate of return of 40%.

Who was the biggest loser in this scenario? The answer is C, Curly. Curly invested in cash to earn what felt like .00000000000000000005% interest in the bank or even worse had to pay the bank a Negative Interest Rate should Curly happen to live in Spain, for example.

Why we Keep Expanding the Money Supply

The monetary system in which we currently reside uses Keynesian Economics with fiat currency. The combination of these, unfortunately, means we must keep expanding the money supply. Sadly, this system punishes responsible people with a “safe” mindset who try to protect their purchasing power in cash.

One question to ask yourself is, How much of something they make more of every day do you want to save? Is it wise to save 100,000 widgets because you’d like to keep them to trade for something else if the factory that makes these widgets can conjure up another 3.3 TRILLION of them on a whim?

Liquidity is Still Important

Now, I’m not saying having cash on hand is always a bad idea. It’s just that, in practical terms, saving your way to prosperity or preserving your wealth over time in a savings account is not always the best use of your hard-earned money. But, having a liquid emergency fund is prudent.