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Debt - Angel or Demon?


Let's talk about Debt baby,

let's talk about you and me,

let's talk about all the good things and the bad things that may be, let's talk about debt.

(picture that sung by Salt-N-Pepa).



Is debt a bad thing? Depends on who you ask. Dave Ramsey would say that debt is the root of all evil. While I don't belive that, I would agree that debt is not the best thing if we are talking about buying things that we don't need with money we don't have (credit card debt). What about other consumer debt? Most would agree that debt on depreciable assets (think cars) is not great, but may be unavoidable and is not the same financial suicide as credit card debt. BUT.... IS ALL DEBT BAD? I would argue that debt on appreciating assets or cash flowing assets is not only not bad, but GREAT!!!!! Here are 5 reasons that debt is GREAT on cash flowing assests: 1. Debt allows you to buy WAY more - think about it for a second. If you have $100,000 then you can buy $100,000 worth of a stock or mutual fund or invest $100,000 in a CD. In each case you will get a return on $100,000. With debt you can buy a $500,000 commercial real estate building ($100,000 cash + $400,000 debt) and make a return on $500,000. 2. Debt allows you to get $$ today (and invest) and pay it off in the future with "cheaper" money due to inflation. 3. Debt allows you to use OPM (other peoples money) to accomplish your goals. 4. Debt means you can scale quicker and diversify. In the example above you don't have to wait to save $500k, instead you can buy 5 different assets by putting $100k down on each. 5. Proceeds from Debt are tax free! If you refinance a property and pull out cash - that $$ is tax free!!! IN SUMMARY If you are buying appreciating/cash flowing assets then debt is your friend and a MUST. If you are buying depreciating assets then make sure you can afford what you are getting and have sufficient resources for repayment. At Sovereign Sage - our goal is to use debt to aquire cash flowing assets. Even if we have all the cash on hand, we achieve higher cash on cash returns by utilizing debt. Keep making the wise decision! Jay Kennedy Sovereign Sage Commercial Real Estate Investor

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