Most traditional financial advice tells you to avoid debt at all costs. This advice is helpful for people struggling with consumer loans and credit card bills. However, it completely misses the truth that debt can be one of the most powerful tools for building wealth when used correctly. As a real estate investor, you must understand the distinction between “good debt” and “bad debt.”

The Crucial Difference: Good Debt vs. Bad Debt

Bad Debt is anything that takes money out of your pocket and generally involves assets that depreciate in value.

• Examples: Credit card balances, car loans (for vehicles that don’t generate income), and high-interest consumer loans.

Good Debt is any liability used to acquire an asset that puts money into your pocket and appreciates over time. It creates cash flow and builds long-term equity.

• The Primary Example: A loan to purchase an investment property, especially multifamily real estate.

The Investor’s Advantage: Using Other People’s Money (OPM)

The goal of good debt is to magnify your returns through leverage.

1. Increased Buying Power: Using debt allows you to purchase a large asset, like a 200-unit apartment community, with only a fraction of your own capital.
2. Cash Flow Generation: When the rent from your tenants covers the mortgage, property expenses, and still leaves a profit, your debt is generating passive income for you.
3. Inflation Hedge: Real estate loans are often fixed, meaning the dollar amount you pay back stays the same, even as inflation devalues the dollar. Meanwhile, your property value and rent collections increase.

Smart real estate investors don’t try to be debt-free. They focus on being cash-flow positive and using good debt to acquire more income-producing assets.