Explain to me good debt

Charlotte, NC · Member since 2017 · 1 post · 0 votes

Hi everyone,

I'm Mike and I'm an intermediate Internet Marketer. I recently became interest in Real Estate and thought I come here for some advice on what good debt actually is. I know bad debt are like credit cards you owed to banks and creditors and things like that. I've been a long fan of Robert Kiyosaki's materials and bought some of his books, but never really came to a full understanding of what they are. So I'd greatly appreciate if someone can educate me on good debt.

I am in bad credit right now, I have $2k school tuition fees that need to pay off and a few credit cards no more than $1k need to pay off.

My goal is to rebuild my credit but I am clueless and don't even know where to start.

One day, I would like to buy my first Apartment unit and rent it out to tenants.

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Eric H.

Real Estate Solutions Provider · Baltimore, MD · Member since 2014 · 571 posts · 452 votes

Great morning @Mike Brown,

I understand good debt as being debt that you can use to earn a better rate than what the debt is costing you. For example, you incur debt at 5% but spend it on an investment that is making you 10%. Essentially you are making 5% with no out of pocket cash. Another way to use good debt is to get a credit card with no interest for 12-18 months. Use those funds to invest in something that yields a decent percentage before the no interest period ends, pay off the debt, and pocket your profit. Another way to use no interest credit cards is to transfer balances from other cards with high interest rates to the no interest card. The key is to pay off the debt before the no interest period ends.

What is your monthly income? If it is considerably higher than your monthly debt payments you are in good shape. The ratio between the two is called your debt to income ratio or DTI. I think it's good that you are starting to analyze your debt while you only have 3k right now. To put that in perspective, I have about 300k in debt and more than half of it is not what I would consider good debt. Bad decisions I made but also valuable learning lessons.

Finally, your last statement should read "One day I WILL own an apartment building". Speak your dreams/goals into existence. Put it out into the universe, TAKE ACTION, and the universe will reward you accordingly.

Happy investing!!

Peace!!

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Nam NguyenPro Member
Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes
9y
I'd like to know about this too. Thanks for asking the question!
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Josh C.Pro Member
Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
9y
Good debt makes you money. So a loan on a business or rental property. The payment should be lower than income. So that money borrowed is "good" for you. Bad debt is anything not making you money. Boats, credit cards, cars, appliance stores, etc. A sort of gray area is your personal home. Not good but not bad either. You have to live somewhere and should be an asset way down the road, but not making money. Gray. Good luck!
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Eric H.
Real Estate Solutions Provider · Baltimore, MD · Member since 2014 · 571 posts · 452 votes
9y
Great morning @Mike Brown,
I understand good debt as being debt that you can use to earn a better rate than what the debt is costing you. For example, you incur debt at 5% but spend it on an investment that is making you 10%. Essentially you are making 5% with no out of pocket cash. Another way to use good debt is to get a credit card with no interest for 12-18 months. Use those funds to invest in something that yields a decent percentage before the no interest period ends, pay off the debt, and pocket your profit. Another way to use no interest credit cards is to transfer balances from other cards with high interest rates to the no interest card. The key is to pay off the debt before the no interest period ends.
What is your monthly income? If it is considerably higher than your monthly debt payments you are in good shape. The ratio between the two is called your debt to income ratio or DTI. I think it's good that you are starting to analyze your debt while you only have 3k right now. To put that in perspective, I have about 300k in debt and more than half of it is not what I would consider good debt. Bad decisions I made but also valuable learning lessons.
Finally, your last statement should read "One day I WILL own an apartment building". Speak your dreams/goals into existence. Put it out into the universe, TAKE ACTION, and the universe will reward you accordingly.
Happy investing!!
Peace!!
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Adam Petterson
Investor · Saint Paul, MN · Member since 2017 · 55 posts · 21 votes
9y
@Mike Brown @Nam Nguyen
Good debt is debt on an asset that produces positive cash flow. For example, you have a property that you collect rent of $2,000 per month. Your expenses are $500 per month and your mortgage is $1,000. This gives you a positive cash flow of $500 per month. The debt on the property is considered good debt, because you are successfully using leverage (debt) to finance a rental property with a positive cash flow. The key is successfully finding investments that create positive cash flow.
Kiyosaki will consider your home a liability (bad debt) because you have no money coming in, and have mortgage, taxes, insurance, expenses going out. Therefore the property has a negative cash-flow. As @Josh C. says earlier in this post, your home is a gray area because you need somewhere to live. I would recommend house hacking if you have the opportunity!
Best of luck, feel free to message me with any thoughts/questions
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
9y
Good discussion and good job, Mike, not having more consumer debt than you do.
I paid off $87k smallest to largest like DR, but in your case I would do the $2k of school tuition first. Seems like they love bad reporting sometimes. They are unpredictable. Punch them in the face with all you got. Then focus all that energy on the smallest cc balance and punch them in the face 1 by 1.
As you go along your RE journey a while, 'good debt' becomes more of an oxymoron. Yes, low fixed rate mortgages can leverage your wealth enormously, but as you acquire reconveyances and satisfaction of mortgages, the only good debt is a retired one. A good debt for me is a dead debt. Cheers!
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