Have you ever wondered how to use debt to build wealth? It sounds counterintuitive but today, we will show you not just how you can make it happen but also how to do it 10 times faster than the majority of people. Stay tuned and learn what the difference between the good and the bad debt is, what assets should be financed with debt, and when you should leverage it.
What You Will Learn About How to Use Debt to Build Wealth:
- The difference between the good and the bad debt
- How you can benefit from leveraging it
- The 3 controllable assets to finance with debt
- An example of how to use debt to build wealth
- When you should leverage it
- How to become wealthy using debt and protect yourself from the risks that seemingly accompany it
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Speaker 1: This is Theriault Media.
Matt Theriault: Hey rockstar, Matt Theriault here from Epic Real Estate. Have you ever wondered how to use debt to build wealth? I mean, how does anybody do that? It almost sounds counterintuitive, right? Well, debt certainly can be used to build wealth but not how you might think, so I’m going to show you what I mean on today’s episode of Financial Freedom Friday.
I’m going to show you how debt can be used and typically is used to build wealth so you can make it happen for yourself and like, I don’t know, ten times faster than how the majority of people go about it, and I’m not exaggerating. Ten times faster. This is important if you want to get wealthy because if you get this part wrong, the richer they’re just going to continue to get richer, you’re going to scratch your head endlessly wondering in spite of your best-vested efforts, you’re going to be wondering why it’s not happening for you.
But if you get it right, you’ll establish confidence and certainty around building your own wealth. Like you’ll have no doubts about it happening to you and you’re likely going to be pleasantly surprised by how fast it does happen, alright? And that’s if you get it right. Speaking of getting it right, you may find this interesting. This is among all of the Fortune 500 companies, and at the time of this video’s recording, of all those companies, only ten of them carry zero debt, the rest have significant debt on their books. But even those ten that don’t, they didn’t start that way and there lies a clue, alright?
Let’s look deeper to see if we can bring the relationship between debt and wealth and we’ll bring that to the surface so that anyone can duplicate these get wealthy results, especially you, alright? To help you with this, what I’ve got, I’ve got five points for you with regard to how to use debt to create wealth. The first one is good debt versus bad debt, what’s the difference? And really just no conversation about debt would be complete if you didn’t start with defining the difference between good debt and bad debt because there’s a big difference.
For the most part, debt … I don’t know, it’s a four letter word for the majority of people in our society. You know, live debt free is normal, traditional advice. I mean, especially if you’re among the millions of Dave Ramsey or Suze Orman fans, as they are in almost perfect agreement that all debt is bad. The reason that they subscribe to that idea is not necessarily because they believe it, but the reason they subscribe to it is the average person is just terrible with money and that’s their core audience, the average person. They assume that if you give the average person debt to use, they’re going to be reckless with it. It’s going to get used on stuff like cars and vacations and restaurants and clothes and stuff.
Generally speaking, debt gets accumulated by buying things that make people look good and feel good in the short term, yet these things they depreciate in value and often very quickly. If that’s the kind of debt we’re talking about, then hey, I agree with Dave and Suze, this type of debt is bad, but in that context only. In the context of the Fortune 500 companies we just talked about, debt is an essential resource to grow massive wealth, to look good and feel good in the long term, and appreciate in value to produce income and provide tax advantages.
Since debt does all that, then in my book debt is good and even great under certain conditions. With that said, let’s just keep the distinction simple, debt is bad when paid back by the salary or the job of the person that used it. Debt is good when it’s paid back by the growth of the business or the investment that uses it. Bad debt costs you, good debt pays you. That’s the difference.
Alright so let’s focus from this point forward, we’re just going to focus on good debt, alright? Number two, why do the wealthy leverage this type of debt? Well, leveraging debt basically enables you to take a small portion of your own resources to acquire a large portion of someone else’s. The common and popular belief of leveraging debt is to multiply returns. That’s what people think is all it does, which is true because it does do that but it’s purpose and benefits that go much further.
You see, the use of debt empowers the borrower to gain full control of an asset, which gives the borrower the full benefits of the asset without fully owning it and those benefits, they can be revenue, it can be appreciation, depreciation, and the use of the asset, as well as long term debt, puts you on the same side of the economy, you know with regard to transferring wealth, with regard to transferring ownership from the lender to the borrower. We do that through amortization and when done right it’s the asset itself that does the work to pay down the debt for the borrower, not the borrower.
Further, due to inflation, the money used ten years, twenty years, thirty years from now to pay off today’s debt, it’s going to have less value so the asset typically hedges against that loss, especially when it comes to using leverage with real estate, which is one of my favorite ways to leverage debt. Although, I do have two more ways that I’ll share with you … Let’s do that now. I guess no time is better than the present and so that brings us to where should the leveraging of debt be used to create wealth? Where to use debt? Because there’s a lot of options.
There are many options for where we can use it and I recommend to most people to try and limit their use of debt to a certain type of asset, specifically controllable assets. Meaning assets that you have control over and I really wish someone would’ve shared this with me much earlier in life as I’ve learned this painful lesson more than once and I can be a slow learner sometimes, but I do learn eventually.
Here’s what I mean, there’s really nothing more frustrating than when you’ve deployed the use of leverage and that deployment fails to meet your expectations due to someone else’s doing. I mean, it wasn’t your fault, their fault, but it is still your responsibility. Hate it when that happens. When leveraging debt, participate, stay in control as much as you can. At the very least, just stay involved and here are my three favorite controllable assets that I would recommend using debt on and I prioritize them like this:
One, yourself. Invest in yourself. Meaning education, training, mentors, and associations in the interest of becoming competent in the acquisition management and disposition of what it is that you plan to use the debt for. Basically, make yourself better. Make your network better because you, you can control you. That’s a good investment.
Two, use debt to invest in your business. With regard to anything that will improve, directly or indirectly improve, the revenue and the value, and most specifically, the profit that the business produces because you can control your business far more easily than someone else’s, so get your business straight before looking at others to use debt to invest in.
Three, invest in real estate because it really is the final frontier where the average person has a legitimate shot at creating significant wealth. Much of the reasoning of that is due to the average person’s ability to leverage debt in real estate in a way that’s unavailable in other mainstream investment options.
That brings us to my fourth point, the how, right? How is it used to build wealth? I’m going to use real estate, I’m just going to stick with this as the model, but these principles they can be applied to other assets as well so I’m going to use some really simple numbers too just to keep the math simple. Do your very best to not get bogged down in the numbers, although I know this is going to be really difficult for my engineers watching, but place your focus on the concept of how the leveraging of debt builds wealth and builds it much faster than you could without it.
Because as long as you understand the concept, you can then later go back and you can just plug in your own numbers, right? Plug in your own numbers that correlate with your own resources and your own asset class, your own market, and your own financial goals, alright? Just focus on the concept and so for an example here, we have a house valued at $100,000 and let’s say you were able to find a motivated seller and acquire that property at $80,000. Now that’s where we show people how to do at The Epic Pro Academy by the way, and it’s not terribly important right now but if you feel this is impossible or really difficult to buy at a discount like this one, it’s not.
The Epic Pro Academy was worth mentioning just for that in case that’s what you were thinking because I mean we do it here in my office on a daily basis and I’ve shown thousands over the last decade how to do the same. Anyway, we’re purchasing this $100,000 property for $80,000. We’re going to place 20% down, $16,000, and then we’re going to leverage the rest from a bank, $64,000. We’re going to do that at 5% for a traditional 30-year loan giving us a monthly payment of $344.
We now control this property without fully owning it but the control, it gives us the right to any revenue the property can produce, the right to any appreciation the property experiences, the right to all of the tax advantages through depreciation and business deductions, and the benefits of the amortization, the paying down of the debt, the transferring of ownership, as well as the preservation of our money’s value through real estate’s hedge against inflation. We leverage debt here to take a small portion of our own resources to acquire a large portion of someone else’s. See how that worked?
Next, we then find a tenant that will pay let’s say $1,200 per month to live in this property and then each month we’re going to collect that rent payment to pay our mortgage payment of the $344, paying down the debt. That’s the amortization at work. I love the amortization. At this point, we have used debt to create income and we use that income to pay off the debt, and then we also get to use the tax advantages of real estate to further offset those debt payments.
It gets really exciting when you start looking at that. The tax advantages include the deductions of the cost of borrowing the money, the deductions from the management costs, the depreciation deductions, and all the other allowable business costs. You get to deduct all of that, and those tax advantages, they add up pretty quickly, often to the point where you can show to the government look, Mr. Government, Mrs. Government, I lost here on paper, yet at the bank, you actually made a profit. There’s more money in your bank account and you can do this legally, honestly, ethically, and even with Uncle Sam’s blessing.
What we’ll do now is we’re going to sit on this property, we’re going to repeat this process every month for let’s say three years as an example, and here’s what happens during those three years. Let’s look at appreciation. The national average housing appreciation since 1968 per the National Association of Realtors is 5.4%. I’m going to be more conservative than the average just to demonstrate that you don’t need massive appreciation to get wealthy like so many people think.
Alright, so we’re just going to cut that appreciation down to 3% of which would cause the property’s value to jump to $110,000. Then when we add in the three years of debt pay down, that gives us that principal pay down of $3,000 and then when you factor … Now just factor in the original equity with the appreciation and the principal pay down altogether.
What that does is it gives us a brand new equity position of $49,000, so through leveraging debt we have turned $16,000 into $49,000. That’s like a 300% return in three years. Pretty slick, right? Yeah, it is but it gets better. It gets way better. It gets better when your wealth starts to multiply because you can now leverage that $49,000 of equity into new debt to acquire three more of these properties, and then just repeat the process all over again. In three years, do it again into nine more properties, which will give you 13 total properties in less than ten years.
Just keeping the math simple, you’ve turned $16,000 into a small million dollar real estate empire with somewhere in the ballpark of, I don’t know, $400,000-$500,000 of equity. The type of returns that would cause Wall Street to blush, and I haven’t even factored in the positive cash flow from the rent along the way. That’s typically what we talk about here is cash flow, cash flow, cash flow. I didn’t count that yet.
Now I can feel it right here through the screen, I can feel the vibes. You’re trying to do the math, I can hear your wheels turning, and you’re thinking of countless hypothetical scenarios as to what you just saw, how this would not work. Well, if that’s the case, instead consider focusing on the countless hypothetical scenarios as to why it would work. Obviously, it does work.
The concept I just showed you is responsible for more wealth for more people than anything else that you can think of. My only intent here is for you to understand the concept of how debt is used to create wealth. The more debt you have, the more money you can make. The more money you make, the more debt you can get. It may seem like it starts a little slow in the beginning, but it snowballs pretty quickly as you just saw.
Alright, so we know what good debt is, why we should use it if we want to become wealthy, where to leverage debt first, and how it works once you begin. The last point is when, when do you begin. When should you leverage debt? That’s number five. Well, as long as you heed the ideas that I’ve shared with you up to this point, I can’t think of too many scenarios of when you shouldn’t use it. Yeah, use it as often as you can, if you want to build your wealth faster that is. You want to go slow? Don’t use it.
Also, when using debt, it frees up the cash you do have to use elsewhere. Another great benefit of debt. I mean, even if the asset breaks even, you’ve done a really good thing because you’ve hedged your balance sheet against inflation and you’ve kept your liquidity outside and available. Because when debt is properly, it’s just a tool. It’s a tool that has a high likelihood of increasing your wealth and a low likelihood of decreasing your wealth.
I mean, unless you move into a deflationary environment, which is … I don’t know, that’s very unlikely unless the mortality rate changes with those that are expecting to withdraw benefits from the government soon. Debt users like us are going to benefit from an inflationary environment with long term debt. In fact, I would saw the cost of not leveraging debt, you’re losing. Yeah, the absence of debt, it slows down your wealth creation, it slows you down through opportunity costs, you know because opportunities, those are missed by insufficient liquidity.
If you’re using your cash just because you can, I mean you’re going to be less prepared and able to jump on the next opportunity that comes your way. Alright, so here’s my basic rule of thumb, when it comes to using debt, my basic rule is use as much debt as you possibly can to build your wealth and when you feel you have enough, eliminate the debt to preserve your wealth, got it? Debt to build, eliminate debt to preserve.
I mean, ultimately debt, it creates speed. It creates speed because it can create cash flow and the faster you create cash flow, the faster your wealth and your financial independence is going to grow. Conversely though the same is true. I mean, I’d be remiss if I didn’t mention your losses can be magnified as well. However, it’s not the debt that is risky and I’m a big proponent of the idea that a basic real estate education will eliminate most real estate risks, so the real estate, that’s not really that risky either. The reality is the people are risky and if you disagree with that, it’s because your real-world experience with debt in real estate it’s either limited or speculative in nature.
You know, Dave and Suze, they continue to caution their audience to avoid debt in real estate altogether just in the interest of protecting their audience but that advice will significantly limit the amount of wealth their audience is going to build and greatly extend the amount of time to build it if they do. Sure, I mean, you’ll be safe with their advice but you’re going to be poor for most of your life too.
If you want to build wealth and avoid the risks that seemingly accompany debt in real estate, I’ve got five things that you can do, five things that you can do to protect yourself from all the stuff that destroys all of those people that give debt in real estate a bad name. It destroys all the naysayers. This is how you can protect yourself from being one of them:
One, invest in your own financial education. Don’t leave that to somebody else. Two, become competent in the operations and management of your asset class. Three, participate. Stay involved. Four, buy with equity in place and before taking ownership, number five, confirm that the asset will pay you more than the debt will cost you.
I’ll see you next week on another episode of Financial Freedom Friday.