{"id":140886,"date":"2021-12-07T11:42:23","date_gmt":"2021-12-07T18:42:23","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=140886"},"modified":"2024-01-29T15:15:17","modified_gmt":"2024-01-29T22:15:17","slug":"is-debt-good-or-bad","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/is-debt-good-or-bad","title":{"rendered":"Is Debt Good or Bad?"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC8265708719&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p><span style=\"font-weight: 400;\">A broad debate exists in the personal financing community about the value and use of debt. Some believe debt is harmful and irresponsible\u2014and should therefore be avoided at all costs. Others believe that debt is a powerful wealth-building tool\u2014and should therefore be embraced by those who want to improve their financial positions.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">So which one is right?&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Well, both are. There are times when debt is harmful, of course\u2014and there are other times in which debt can provide exciting wealth-building opportunities.&nbsp; <\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">In this article, I am going to break down the differences between types of debt usage and offer real-life examples of what should be considered &#8220;good debt&#8221; and what should be considered &#8220;bad debt.&#8221;&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">What is debt?&nbsp;<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">Before we get into how you can use debt to build wealth, it&#8217;s important to fully understand the basics of debt.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Debt is really just another term for borrowing money. When you borrow money with a loan\u2014like when you take out a mortgage\u2014you are assuming a debt that must be repaid to the lender. There are countless types of debt, but the basic premise of all debt is that a lender agrees to loan a borrower X dollars at Y interest rate.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">The borrowed amount is known as the principal. The interest rate, on the other hand, is essentially the cost of borrowing money. The higher the interest rate, the more expensive it is to borrow the money. The lower the rate, the cheaper it is to borrow. <\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">As a borrower, you want the lowest interest rate possible.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">It\u2019s also important to state the obvious here: When you use debt to buy something, you pay more than the list price for that item. If you buy a new TV for $1,000 at a 10% interest rate and pay it off after one year, you ultimately pay a total of $1,100 for the TV rather than $1,000 thanks to the 10% interest that&#8217;s tacked on. And, the same is true for both good and bad debt.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">What is bad debt?<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">I am going to categorize any debt that is harmful to your long-term financial position as bad debt. But, to be clear, that isn\u2019t a judgment of those who hold this type of debt. Almost all people, myself included, have used this type of debt, and many people rely on it just to make ends meet. I am calling it &#8220;bad&#8221; simply because it is bad for your long-term personal financial situation.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">The way I define &#8220;bad debt&#8221; is the money borrowed to finance your lifestyle. This may be a payday loan to buy groceries or cover the costs of an unforeseen expense. Other times, this debt may be taken on to purchase something you want but don\u2019t have the money for\u2014like a vacation, some new electronics, or a new wardrobe. <\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">To be clear, though, taking on bad debt doesn\u2019t necessarily mean you&#8217;re buying something frivolous. It means you\u2019re buying something that won\u2019t help you pay off the debt. <\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">As such, this type of debt is harmful in two ways.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">The first is that interest rates on this type of debt are often extremely high\u2014at least compared to other types of debt. Credit cards, for example, will typically have an interest rate at or over 20%, and the interest rates on payday loans can average between 15-20%. <\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Those are extremely high interest rates, especially when you consider that the average interest rate on a 30-year fixed-rate mortgage loan was averaging just 3.1% as of early December. Comparatively, that is not cheap debt. And, if you aren&#8217;t careful, the amount you owe on this type of &#8220;bad debt&#8221; can quickly spiral out of control.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">If you need an example of how this happens, take a look at the graph below<\/span>. This table depicts how at 22% interest, a $1,000 purchase turns into over $7,300 in debt over 10 years. <\/p>\n\n\n\n<p>This is, of course, an extreme example because it assumes you\u2019re not paying off any debt over 10 years. But I wanted to demonstrate the key point here that debt compounds. The longer it takes you to pay off your debt, the faster your debt accumulates. <\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><span style=\"font-weight: 400;\"><strong>Year<\/strong>&nbsp;<\/span><\/td><td><span style=\"font-weight: 400;\"><strong>Amount Owed<\/strong><\/span><\/td><td><span style=\"font-weight: 400;\"><strong>New Debt<\/strong><\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">0<\/span><\/td><td><span style=\"font-weight: 400;\">$1,000<\/span><\/td><td><span style=\"font-weight: 400;\">$0<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">1<\/span><\/td><td><span style=\"font-weight: 400;\">$1,220<\/span><\/td><td><span style=\"font-weight: 400;\">$220<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">2<\/span><\/td><td><span style=\"font-weight: 400;\">$1,488<\/span><\/td><td><span style=\"font-weight: 400;\">$268<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">3<\/span><\/td><td><span style=\"font-weight: 400;\">$1,816<\/span><\/td><td><span style=\"font-weight: 400;\">$327<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">4<\/span><\/td><td><span style=\"font-weight: 400;\">$2,215<\/span><\/td><td><span style=\"font-weight: 400;\">$399<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">5<\/span><\/td><td><span style=\"font-weight: 400;\">$2,703<\/span><\/td><td><span style=\"font-weight: 400;\">$487<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">6<\/span><\/td><td><span style=\"font-weight: 400;\">$3,297<\/span><\/td><td><span style=\"font-weight: 400;\">$595<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">7<\/span><\/td><td><span style=\"font-weight: 400;\">$4,023<\/span><\/td><td><span style=\"font-weight: 400;\">$725<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">8<\/span><\/td><td><span style=\"font-weight: 400;\">$4,908<\/span><\/td><td><span style=\"font-weight: 400;\">$885<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">9<\/span><\/td><td><span style=\"font-weight: 400;\">$5,987<\/span><\/td><td><span style=\"font-weight: 400;\">$1,080<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">10<\/span><\/td><td><span style=\"font-weight: 400;\">$7,305<\/span><\/td><td><span style=\"font-weight: 400;\">$1,317<\/span><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><span style=\"font-weight: 400;\">You\u2019re accumulating $220 in new debt in year one, which may not seem very high, but the key here is that the interest compounds. By year nine, you\u2019re accumulating over $1,000 of new debt annually on what you owe. That\u2019s more than the initial purchase! <\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Given how much the interest can add to what you owe, it&#8217;s clear that carrying a balance on high-interest debt is a recipe for disaster.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">The second way that this type of debt is harmful is that it makes your lifestyle purchases more expensive. Using debt to make a purchase means that you\u2019re paying more on your purchase than if you paid cash. This can be OK if it&#8217;s done from time to time. Over time, however, it can be truly debilitating.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">I am generalizing here, but if you are using debt to finance your lifestyle, it likely means that your financial position isn&#8217;t very strong. And that\u2019s OK\u2014we all start somewhere. <\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">My point here is that if you\u2019re using debt to finance your day-to-day expenses, chances are that you\u2019re not in a good position to pay off what you owe quickly. When you wait to pay off your high-interest debt, it&#8217;s easy to find yourself in a downward spiral\u2014one in which you owe more and more money.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Let\u2019s look at an example using our friend Jessica.&nbsp;Jessica has a W2 job that allows her to save $200 per month<\/span> while covering her other expenses:<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><b>Gross Income<\/b><\/td><td><b>&nbsp;<\/b><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">W2 Job<\/span><\/td><td><span style=\"font-weight: 400;\">$3,500<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">&nbsp;<\/span><\/td><td><span style=\"font-weight: 400;\">&nbsp;<\/span><\/td><\/tr><tr><td><b>Monthly Expenses<\/b><\/td><td><b>&nbsp;<\/b><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">Rent<\/span><\/td><td><span style=\"font-weight: 400;\">$1,500<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">Car Payment<\/span><\/td><td><span style=\"font-weight: 400;\">$400<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">Groceries &amp; Essentials&nbsp;<\/span><\/td><td><span style=\"font-weight: 400;\">$600<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">Insurance<\/span><\/td><td><span style=\"font-weight: 400;\">$200<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">Student Loans&nbsp;<\/span><\/td><td><span style=\"font-weight: 400;\">$300<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">Gym<\/span><\/td><td><span style=\"font-weight: 400;\">$100<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">Other<\/span><\/td><td><span style=\"font-weight: 400;\">$200<\/span><\/td><\/tr><tr><td><span style=\"font-weight: 400;\">&nbsp;<\/span><\/td><td><span style=\"font-weight: 400;\">&nbsp;<\/span><\/td><\/tr><tr><td><b>Monthly Savings<\/b><\/td><td><b> <\/b><strong>$<\/strong><b>200<\/b><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><span style=\"font-weight: 400;\">That\u2019s great! Having the ability to save $200 per month is a good place to be at. But now let\u2019s imagine she has an unforeseen expense of $10,000\u2014and she puts it on her credit card at a 26% interest rate.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">If she had continued to save the $200 per month rather than using it to pay down the debt, her net worth would sink over a period of 12 years thanks to the compounding interest on the $10,000 purchase. <\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">In fact, just due to the $10,000 purchase with 26% interest, her net worth would be about -$126,000 after 12 years. Yikes<\/span>!<\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Now let&#8217;s look at a more realistic scenario. Let\u2019s say Jessica used the $200 per month she was saving\u2014which I increase by 3% per year for inflation\u2014to pay off as much of the debt as possible.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Even with that more aggressive repayment plan, she would still have a negative net worth of almost -$99,000. That is debilitating debt.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">And remember, this is a scenario in which most months Jessica is living within her means\u2014and is making more than she spends. But the one-time big expense that was financed by a credit card created years of financial distress.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">So, it&#8217;s pretty clear that high interest debt\u2014debt that doesn\u2019t do anything to improve your long-term financial position\u2014should be avoided as often as possible. And again, I know many people rely on this, but you should try to do it as sparingly as you possibly can.&nbsp;<\/span><\/p>\n\n\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">What is good debt?<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">Now for the fun part: good debt. It turns out debt can be really bad\u2014or really beneficial!&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">To me, &#8220;good debt&#8221; is defined as debt that is used to finance an investment\u2014one that will help you to make more money in the future.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">This type of debt can come in several forms:&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span style=\"font-weight: 400;\"><strong>Student loans:<\/strong> The amount of student debt in the U.S. is insane, but when used properly, a student loan is an investment. Most college programs have a positive return on investment (ROI)\u2014as I recently discussed on <a href=\"https:\/\/www.biggerpockets.com\/blog\/biggerpockets-money-podcast-251-preston\" target=\"_blank\">the BiggerPockets Money Podcast<\/a>\u2014and by taking on this debt, most individuals are making an investment that will help them earn a higher salary in the future.&nbsp;<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\"><strong>Business expenses:<\/strong> If you want to start a business\u2014like a property management company\u2014you need materials. That could be tools, a truck, or anything else related to the company. If you use responsible debt to finance these purchases, this is good debt because they are an investment in your future.&nbsp;<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\"><strong>Real estate loans:<\/strong> This may be obvious to anyone who reads BiggerPockets regularly, but using debt is the most common way to finance real estate acquisitions. And, it is a very powerful wealth-building strategy, too.&nbsp;<\/span><\/li>\n<\/ul>\n\n\n\n<p><span style=\"font-weight: 400;\">To be clear, these loans do cost money. And, by nature, the interest makes the purchases more expensive. But the difference is that these loans are also going toward the financing for money-making ventures. The key is to ensure that the money-making venture has high enough returns to help you pay off the debt and then some.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">The other thing to note here is that these types of loans tend to come with lower interest rates. Mortgages are currently between 3-4%, car loans are typically under 5%, and federal student loans rates hover around 3.73% for 2021.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">That lower interest rate makes a huge difference. Not only do these loans help you earn money in the future \u2014 as opposed to just paying for everyday expenses\u2014but they are also cheaper. <\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">In other words, it&#8217;s much less expensive to use debt to finance an investment in yourself than it is to use debt to fund your lifestyle. Remember that.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">And, that makes sense, right? Lenders, like banks, set interest rates on loans based, at least in large part, on the risk. The riskier the loan, the higher rate the lender typically charges. That helps to balance the risk-reward profile.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">As such, lenders typically see debt that is used to finance an investment as being less risky than debt being used to fund a lifestyle. When a lender funds a mortgage for a rental property, they know that property is likely to generate rent revenue that the borrower can use to pay off the debt. <\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">In turn, the borrower is typically in a better position to service their debt by taking on the loan. That\u2019s a good prospect for the lender\u2014or, in other words, safer debt\u2014so they often lend at lower rates because it&#8217;s less risky than it otherwise would be.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">On the other hand, when a lender loans money to someone for a lifestyle expense, the borrower is putting themself in a worse financial position than they were before because they\u2019re paying more than list price on a purchase that won\u2019t make them any money. That is riskier for the lender, and the lender charges a higher interest rate to mitigate the risk.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Let\u2019s look at two quick examples of good debt:&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">First, let\u2019s return to Jessica, who in this scenario takes out a $50,000 student loan at a 4% interest rate. This scenario is similar to the one above. The big difference is that instead of making $3,500 per month from her job, Jessica is now making $4,300 per month because she has a college degree.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">While Jessica\u2019s net worth starts deeply negative, in the course of just five years, she has a positive net worth. This is still a lot of debt, but because the debt went toward helping Jessica make more money, the debt was easily serviced and paid off in a reasonable timeframe.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Next, let\u2019s look at an example of using a mortgage to purchase a rental property<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">In this scenario, Jessica purchases a $400,000 rental property. She put 25% down and the rest was financed with a mortgage loan at a 4% interest rate.*&nbsp;<\/span><\/p>\n\n\n\n<p>*<i><span style=\"font-weight: 400;\">Note that this is a super simple deal analysis. This is done intentionally just to show the benefit of debt.<\/span><\/i><span style=\"font-weight: 400;\">&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Jessica is taking on a huge amount of debt here of $300,000. That said, because her rental property generates enough rent to pay her mortgage note and break even on expenses, she can easily service the debt.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Over time, Jessica\u2019s property appreciates in value, which I modeled at 2% here. It reaches a value of $487,598 in 10 years due to appreciation. During that same time 10-year timeframe, Jessica is able to pay down $63,648 on the principal and only owes the bank $236,352 when she sells the property after 10 years.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">When Jessica sells, her profit is approximately $151,000. This amounts to an annualized ROI of 15% per year. That\u2019s amazing\u2014and isn\u2019t even factoring in cash flow.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Jessica initially invested $100,000 in this scenario, which is just 25% of the purchase price of the property. But because the property grows in value over time, Jessica gets to keep 100% of the increased equity. As long as she pays her mortgage on time, she gets to enjoy the benefits of appreciation and loan pay down\u2014as well as cash flow and tax advantages which are not shown here.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">I hope you can see why this type of debt is beneficial! Jessica used debt to purchase a property that made her tons of money over time. Yes, she paid the bank a lot of money in interest over 10-year, but that is the price of her investment, which made her a 15% annualized ROI.&nbsp; That\u2019s a great use of debt!&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Another thing to note here is that debt in regard to real estate investing can really scale. As long as you\u2019re using debt to purchase cash flowing properties\u2014and properties that can service the debt\u2014you can get more and more and more debt. It sounds risky, but if your deals are solid, it shouldn\u2019t be.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">I am personally millions of dollars in debt from real estate purchases\u2014and I\u2019m thrilled about it. That enormous amount of debt has allowed me to build a cash-flowing portfolio that builds equity over time. And with interest rates as low as they are, I am hoping to go further into debt in the near future.&nbsp;<\/span><\/p>\n\n\n\n<div id=\"hero-block_62df1a82bfc88\" class=\"first:mt-0 hero-block py-4    has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">The Money Podcast<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">Kickstart your personal finance journey with Scott and Mindy as they break down the good, bad, and ugly of people\u2019s personal money stories. From interviews with entrepreneurs and business owners to breakdowns of listener finances, you\u2019ll get actionable advice on how to get out of debt and grow your money.<\/p>\n\n\n\n<div id=button-custom-event-block_65400b52d0a76 class='button-custom-event'>\n      <a href=\"https:\/\/link.chtbl.com\/Money\" x-on:click=\"window.analytics.track(&#039;Money Podcast Blog CTA Click&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/is-debt-good-or-bad&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-slate-dark-background-color has-text-color has-white-color\" target=\"_blank\" rel=\"noopener\">Listen Now<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\" first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  shadow-xl rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/12\/BP_Money_podcast_square-1024x1024-1-e1660861377128.jpeg\" alt=\"\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n\n<h3 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">Final thoughts<\/span><\/h3>\n\n\n\n<p><span style=\"font-weight: 400;\">While these examples are simplified to convey a point, it\u2019s important to recognize that all debt, whether it\u2019s good or bad, comes with risk, and that&#8217;s true even if you\u2019re taking on debt to finance a degree, a new business, or a rental property. If you cannot meet the obligations of your debt, you can put yourself into a terrible financial position \u2014 and could even face bankruptcy.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">To avoid a negative outcome, you should only take on debt that you can confidently pay back. Don\u2019t use a mortgage to buy a home that doesn\u2019t result in cash flow. Make sure you have plenty of excess liquidity in case of an emergency. You shouldn\u2019t be using your last dollars each month to service your debt. You should have plenty of reserves in case of vacancy, big repairs, or some other large expense.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Using myself as an example, all of my properties produce solid cashflow\u2014and I have a W2 job. So, while there is always risk in investing, I feel confident that I will be able to service my debt, even if large unforeseen expenses arise.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">The point here is that you shouldn&#8217;t be afraid of debt. Debt is a critical wealth-building tool for people who use it responsibly, particularly in the realm of real estate investing\u2014so learn more about it! Do your research, learn what types of debt are best for your needs, and only take on debt that is used to fund an investment into your future.&nbsp;<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>There are times when debt is harmful, and there are other times in which debt can provide exciting wealth-building opportunities.\u00a0 <\/p>\n","protected":false},"author":108611,"featured_media":140930,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7119],"tags":[672,7295,7,3612],"class_list":["post-140886","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-biggerpockets-daily","tag-debt","tag-real-estate-debt","tag-investing","tag-wealth-building"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/140886","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/108611"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=140886"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/140886\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/140930"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=140886"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=140886"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=140886"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}