Using good debt to accelerate your investment strategy – part 1

​Contrary to popular belief, taking on debt, when done correctly, is one of the safest and most powerful ways to accelerate your investment strategy and build wealth. In this series of posts we explain the benefits and risks of leverage, the risks of not using leverage, and how to manage as much debt as possible without taking too many risks.
 
Let’s start by looking at the benefits of leverage.

​Control More Property. Leverage enables you to control more property than you could otherwise control if you used only your own cash. For example, let’s say you had $100,000 in cash. You could use that money to buy a single house worth $100,000, or you could use the same money to buy five houses of equal value with 20 percent down. Now let’s assume property values appreciate by 10 percent over the next 10 years. If you bought a single $100,000 house, then you’d gain $10,000 in equity from the appreciation. Alternatively, if you bought five houses with 20 percent down, then you’d gain $50,000 in equity from the appreciation (i.e. $10,000 per house). Which would you rather have at the end of ten years, $10,000 or $50,000?
 
Use Inflation to Your Advantage. Leverage allows you to use inflation to your advantage. We looked at real estate as a hedge against inflation in an earlier blog post, suffice to say leverage enables you to pay back borrowed money with future dollars that are less valuable than they are today.
 
Asset Protection. Debt makes for an excellent asset protection strategy. If you owned a $100,000 rental property free and clear and your tenant happens to slip and fall (or maybe you just have a litigious tenant), then you have $100,000 at risk should your tenant attempt to sue you and force the sale of the property. However, if you only have $20,000 of equity in the property, then the property becomes a much less enticing target. 

​Control of Equity. Paying off a mortgage does not make a property perform any better as an investment. Yes, you have more cash flow without debt payments, but a paid off property does not improve appreciation. Likewise, debt on a property does not reduce appreciation. In other words, there is no direct return on equity. All you accomplish by putting cash into a property is tying up cash that could be used on other assets.
 
For instance, if you take $80,000 out of your house, then you retain control of the house but can put that money to work elsewhere. Debt means that you are in control of your equity—it gives equity back to you. The purpose of a house is to put a roof over somebody’s head, not to store cash (except in certain situations like homestead protection). At Mayfair Real Estate, we like to use leverage to buy properties, force equity up through various improvements, and then pull the equity out to deploy to other assets.

"Ultimately, you want to build equity over time and across multiple assets. You accomplish that by taking on as much good debt as possible to accelerate your investment strategy and create wealth." 

​Hedge Against Down Markets. Debt serves as a nice hedge against downturns in the market. If the market takes a plunge and your property that was worth $100,000 two years ago is only worth $60,000 today, then your equity takes a pretty big hit if you own the house outright ($40,000, to be exact). Alternatively, if you had an $80,000 mortgage on the house (i.e. $20,000) and the value of the house drops to $60,000, then you’ve only lost $20,000 in equity. As long as you’re paying your mortgage and getting cash flow from the property, it really doesn’t matter if the value of the house goes up and down.
 
Ultimately, you want to build equity over time and across multiple assets. You accomplish that by taking on as much good debt as possible to accelerate your investment strategy and create wealth. In our next post, we’ll explain how to accomplish that without taking too many risks. Many very successful investors have done it, and you can too.