Using Debt as Positive Leverage:
The following is an online conversation between an investorwho feels that being debt free is the only way to invest. Some people feel that paying off all theirdebt and mortgage is the way to financial prosperity.
Many Financial Authors also push this debt free mantra (SuzeOrman, Dave Ramsey, and John Burley) the thinking is that if you have no debtand live frugally you will be comfortable in retirement.
There is also another way, a way that myself and many otherssubscribe to. It actually increases yourretirement income exponentially and provides a far greater lifestyle thatliving frugally in your retirement years.
The Secret is Leverage.
In the example below you can see how debt used properly canexplode your investing and retirement.
Russ is a real state investor and owns a Bed and Breakfastin Napa,CA
Robert Kiyosaki differentiates between bad debt-- stuff that takes money OUT ofyour pocket (a car loan, credit cards, personal home mortgage, etc), and gooddebt-- stuff that puts money IN your pocket (say, a home that you own and rentout, and get $150/mo profit after paying the mortgage, taxes, and upkeep).
When we first got started, we were very anti-debt. We had 2 homes- one we livedin, and the other, a fixer-upper. By 2002, my plan was to sell one house, andwith the money I cleared, pay off the other house's mortgage entirely. We'dinvest what was left after paying off the mortgage, and live off the interest.In other words, if I cleared $500K when I sold the first house and paid thehouse I was living in off for $135K, I would have $365K left to invest. If Iinvested the $365K in interest-bearing Treasury bonds (say, at 5% per year),that would give me $365K x 5% = $18,250 per year to live on, for the rest of mylife, without touching any of the $365,000 principle.
That was my plan, based in large part on what I'd learned from folks like SuzeOrman and Dave Ramsey. This way, once I sold the house, my money would"work for me" (to use an RK phrase), and give me enough to live on.Since my house would be paid off (all of my cars and everything else wasalready paid off), I could easily live on $18K per year.
So, my plan was to have NO DEBT by 2003, and have $18,000+ coming in, while Ikicked back and did nothing.
Sounds pretty sweet, eh?
But then our lives changed. We read Rich Dad Poor Dad, and started playing theCashflow game . . .
Here we are 4 years later from our original 2003 "retirement" goal.We are *not* retired (still working-- lots), and have LOTS of good debt (over$3,000,000.00). The properties we own with this good debt bring in over$700,000 a year before expenses, which pays for the debt payments.
If we sold EVERYTHING today, after paying off all of that good debt, we'd haveabout $4,000,000.00 before paying off the realtors and income taxes.
Or, about $3,000,000 after these expenses.
$3,000,000.00 x 5% Treasury Bonds = $150,000.00 per year.
Seems a little bit sweeter than $18,000, eh?
But we aren't going to cash out-- not yet.
Based on some of Robert Kiyosaki's other principles, we're adding value to oneof our properties, and will sell things in another 5 years or so.
At that point, we'll have about $5,000,000 after sale expenses.
$5,000,000.00 x 5% = $250,000.00 per year income, while we sit around and justhave fun.
The above scenario is one of the things we learned by playing cashflow. Welearned how to handle good debt, and how to get rid of as much bad debt aspossible (e.g., we currently have no car loans or credit card debt).
But we do have lots and lots (and lots) of RE mortgages-- over $3,000,000.00worth. That good debt helps us get over $700,000 a year-- before expenses. Andwithin 2 years, we should be bringing in well over $1,500,000.00 beforeexpenses, since we're developing that other property.
This is just one example of how "good debt" can really work for you--and put you WAY ahead of the game-- using leverage.
There are many others on these forums who are doing the same thing-- withdifferent strategies, and different properties or investments. But all of themcenter around "good debt".
Hoping this makes sense . . .
-Russ H.