How the Wealthy Use Debt and Taxes to Build Extra Wealth

Using debt to build wealth is something that might seem a bit confusing but, honestly, it’s one of the smartest things the wealthy do. Wait, what? Debt to build wealth? Isn’t debt bad? Well, not always. In fact, when done right, debt can actually be one of the most powerful tools for building long-term financial freedom. Let me break down exactly how it works, especially with real estate.

How to Use Debt to Get Rich: The Rich Person's Playbook

"Matt, are you crazy? Debt is dangerous!" And you're not wrong... if we're talking about credit card debt from buying too many lattes. 

We’ve all been taught to avoid debt like the plague. You know, the idea that debt is something you want to pay off as quickly as possible because it’s “bad.”  But the wealthy? They're playing a different game altogether.

The rich don't work for money; they make money work for them. And one of their favorite tools? Good ol' debt. But not just any debt - we're talking about strategic debt that helps them build empires. 

Let's break down how they do it, and how you can too, even if you're starting small.

Leveraging Real Estate to Build Wealth: The 3X Asset Strategy

Ever heard of 3X assets? It's a strategy the wealthy use to turbocharge their wealth-building. A 3X asset is something that gives you three benefits: cash flow, appreciation, and tax advantages. And guess what's at the top of that list? You got it - real estate.

Using debt to build wealth in real estate is all about leverage. Let's say you buy a $100,000 property with a $20,000 down payment. If that property appreciates by 5%, you've made $5,000. But your return isn't 5%, it's 25% because you only put down $20,000. That's the power of leverage.

And it gets better. Let's talk about the "buy, borrow, die" strategy. Sounds morbid, I know, but stick with me.

1. Buy: You purchase an asset (like a rental property) that appreciates over time.

2. Borrow: Instead of selling the property to access its increased value, you borrow against it. This gives you tax-free cash to reinvest.

3. Die: When you pass on, your heirs inherit the property at its stepped-up market value, potentially avoiding capital gains taxes.

It's like playing Monopoly, but in real life. And the best part? You don't need to be a millionaire to start. Even a modest rental property can get you in the game.

Is Real Estate Debt Good?

The answer is... it can be, if you use it right. Remember, not all debt is created equal. Credit card debt for a shopping spree? Bad. A mortgage on a cash-flowing rental property? Now we're talking.

Debt and real estate go together like peanut butter and jelly. When you use debt to acquire real estate, you're not just buying a property - you're buying an income stream, a hedge against inflation, and a wealth-building machine. Now, the rich don't just use debt to buy properties; they use it to avoid taxes too. 

Now, I'm not talking about tax evasion here. That's a one-way ticket to a place you don't want to go. I'm talking about legal, IRS-approved strategies that the wealthy use to minimize their tax burden.

Ever heard of cost segregation? It's a little trick that lets real estate investors accelerate depreciation on their properties. In simple terms, it means you can take bigger tax deductions upfront. More money in your pocket, less in Uncle Sam's.

And maybe you know about the real estate professional status. If you or your spouse qualify, you can use real estate losses to offset your W-2 income. That means potentially paying zero taxes on your day job income. Legal? Absolutely. Powerful? You bet.

Now, I know what you're thinking. "Matt, this sounds great, but isn't debt risky?" You're right to be cautious. Debt is like fire - it can keep you warm or burn your house down. It all depends on how you use it.

What About the Risks?

Now, let’s be clear—using debt to build wealth isn’t without risks. If the market turns and property values drop, you could end up owing more than the property is worth. This is why it’s important to do your homework, buy in strong markets, and ensure your properties are cash flow positive (that means your rental income is higher than your expenses).

Have a solid plan in place. Debt can work wonders when managed correctly, but if you over-leverage yourself (borrow too much), it can backfire. So, make sure you’re comfortable with the amount of risk you’re taking on and that you have a strategy to handle any potential downturns.

Also, finding the right properties can make all the difference when you're starting out. That's where tools like Mailmix.io come in handy. They offer done-for-you direct mail campaigns that can help you uncover hidden gem properties before they hit the market. 

And if you're ready to explore the world of off-market properties, Go Off Market is your ticket to finding the best deals with guaranteed best prices.

Here are five ways to keep your debt strategy from blowing up in your face:

1. Invest in your education. The smarter you are about your investments, the lower your risk.

2. Stay involved in managing your assets. Passive income doesn't mean uninvolved income.

3. Buy with equity in place. This gives you a cushion if the market dips.

4. Ensure your asset generates more income than the debt costs. This one's a no-brainer, but you'd be surprised how many people get it wrong.

5. Maintain a conservative leverage ratio. Keep your loan-to-value ratio below 70-75%.

Like I say, starting smart always beats starting big. Even a small rental property can be your first step on the path to financial freedom.

How to Use Debt to Get Rich

Now, I know you are probably thinking. "This all sounds great, but I'm not a millionaire. Can I really use these strategies?" Absolutely! The same principles that work for the big fish can work for you too, even if you're just starting out.

Let's say you own a $350,000 home and you've built up $100,000 in equity. You could take out a home equity line of credit (HELOC) to borrow that $100,000 tax-free. 

Then, you could use that money to buy a rental property or invest in dividend-paying stocks. Boom! You're now using the same strategies as the wealthy.

Or maybe you have a small stock portfolio. Did you know you can borrow against it using a margin loan or securities-backed line of credit? It's as easy as clicking a button with some platforms. The key is to start where you are, with what you have. 

Debt and Taxes Can Make You Money

The bottom line? The rich don't work for money - they make money work for them. And now, you have the blueprint to do the same.

Remember, using debt to build wealth isn't about being reckless. You need to be strategic and understand that debt used wisely can be a powerful lever to accelerate your wealth journey. 

So, are you ready to start building? And hey, if you're feeling overwhelmed by all the research and analysis, don't sweat it. We've got your back. Our done-with-you real estate investing approach means you can lock in your first cash-flowing property in 90 days or less, even if you have zero real estate experience. Leverage debt to your advantage today!