Tuesday, April 24, 2007

Manageable/Productive Debt Can Work For You

I gave a presentation yesterday to some professionals from a number of industries. The topic was what I do as a commercial/investment real estate agent. Moreover, I took some time discussing the ins and outs of investment real estate. Inevitably, the subject turned to debt.

The bankruptcies and foreclosures we are seeing are at record levels. But this is the tip of the iceburg and it is going to get far worse before it gets better. Still, the question came up about using debt (leveraging bank funds) to purchase property. Now, readers to this blog know that I rant and rave about your home "not" being an investment (unless you are charging rent and it throws off income). There is one school of thought about only buying investment property for cash -- no borrowing from a lender. Another school says you should borrow, because you are leveraging the power of the bank and you are not out of pocket so much in the beginning.

The bottom line on debt is that it should work for you, and not against you. Credit card debt -- commonly known as consumer debt -- works against you. Unless you are printing money, if you pile up enough debt it is hard to get out from under it. Debt tied to income-producing properties is different. Your residents (in apartments), or office or warehouse tenants actually pay the debt for you. Properly structured, their rent payments are supposed to cover the expenses to operate the property, service the debt, and hopefully, put some extra cash in the bank.

Consumer debt is destroying families. Manageable/productive debt tied to an investment property is debt paid back by others. And it can work in your favor.

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