Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

The Great Leverage Debate: Debt or No Debt

Written by Than Merrill

While debt is largely considered a hindrance, there are those who believe it is a necessity.  Of particular interest, however, is the debate over debt as it pertains to the real estate industry. So as a real estate investor, is it actually beneficial to be in debt? Some may find it hard to believe that debt is beneficial to a smart investor. However, used correctly, debt can actually make your business more profitable.

Eight years ago, access to credit was a hot commodity. However, the recent recession brought the theory of debt into perspective.  The wake of the housing sector decline has forced many to question the benefits of leveraging money. It is not uncommon for someone to shy away from debt all together.  Are too many people overcompensating for past transgressions or is this just an issue of timing?

Relatively new investors have demonstrated an increasing will to avoid leveraging money, even what they themselves consider to be “good debt.” Ironically, however, this thought process  isn’t representative of the pool of investors who got burned when the housing bubble burst. Those investors, for the most part, now recognize their own mistakes.

Greener investors, who otherwise appear to be rational individuals with good jobs, are the most fearful of debt. A majority of newer investors try to avoid debt all together, while others are intent on using every penny they have to pay off a respective loan.

What’s so bad about that? Staying out of debt is something almost every American should strive for.

There are many advantages that present themselves by not taking on debt in the real estate industry. It can relieve a lot of pressure, reduce stress in tight times and allows many to sleep more soundly at night.

However, the debt free strategy can also be a very dangerous one. By not accepting debt, investors are severely limiting their growth and profit potential. More importantly, with a limited amount of funds, you are essentially tying up all of the money you have on one investment. Without the ability to borrow money, your potential is limited. It can almost be said that you are keeping all your eggs in one basket. Without leveraging other peoples’ money, big ticket items and unexpected repairs become a severe hindrance.

Conversely, investors that leverage money are only limited by their imagination.  While investors afraid of debt can only acquire one property at a time, those willing to take on debt can see multiple properties come their way. This means more profits in a shorter period of time. Don’t be foolish with debt, but recognize that no debt isn’t really freedom if it doesn’t give you financial freedom.