Society tells us that debt is bad, but that’s not true. Drowning in debt is bad, yes. But having some debt can actually be beneficial to your financial wealth. Often times, people tell me their goal is to be out of debt by the time they retire. To them, having no debt was a sign of being successful. If you were in debt when you retired, you had to have failed at something. But let’s use an example to explain how debt can be good.
Let’s say you have multiple properties that you paid your mortgage off, but in doing so, your available cash flow became a little tight. Then the market changed, and you aren’t able to get the same cash flow from rent and other income. If you approached a bank to get a loan to cover some of the shortfall, what would the bank likely do? A bank is only going to be your friend in good times; a bank is not there to take on risk and will only give you loans if you have adequate cash flow. Banks only give you money when you don’t need them. You wouldn’t be able to get loans from banks because even though they had the assets, they did not have the cash flow. They’d put all their eggs in one basket—and then dropped the basket.
What was I able to do? We looked at what they had and what they’d have to do with their properties to get themselves out of this situation. There were some properties they owned that, even in good times, weren’t good cash flow producers, but they’d held on to them for personal reasons. That kind of thinking isn’t helpful when you’re trying to build cash flow. Bad real estate is like a bad stock. When the market goes down, if you’re in a bad stock, you’d better sell it. If you’re in a good stock, good stocks normally come back, just as good real estate normally comes back. Bad real estate and bad stocks do not, so there was some real estate they had to let go. When they did that, their cash flow improved because they were not stuck throwing money at bad properties. When their cash flow improved, we were able to go to a bank and show the bank that they were taking steps to improve cash flow. The bank decided that now they were a better risk, so it gave them some short-term borrowing ability. The borrowing allowed them to fix up properties to attract better tenants and to pay their expenses, so they didn’t lose the buildings.
Also, if having extra cash flow is an option then investing and increasing your dividend is the best way to go. Instead of paying off debt, use the extra cash flow to multiply your wealth.
For more information about using debt to your advantage, visit tswealth.com.