You Heard That Right
The idea of using debt to buy a real estate investment sort of sounds…crazy? It’s not, as it’s a growing trend in the real estate business.
Let’s set the record straight from now. We are not talking about the “I just maxed out my credit card to go on vacation” kind of debt. Instead, we’re talking about the “I took out a loan for my real estate investment and the cash flow covers the debt payment” kind of thing. Make sense?
We are looking at the debt that puts money back into your pocket, not pulls it out. So what does it take to get a hold of a real estate investment with debt? Let’s get into it.
The Good, the Bad, and Everything in Between
There are two main types of debt: the good and the bad. No, seriously. You can have two forms of debt. The type that drowns you or the type that gives you the chance to float back up.
The Bad Debt- Big No-No For Real Estate Investment Shopping
Most of us have the same definition of what bad debt is. Bad debt is what you use on your wants, not your needs. You know, like that expensive diamond ring or pair of designer shoes. In other words, bad debt comes with liability purchases (like a car or vacation).
The type of “debt investment” you should aim for is for an income generating asset. The definition of an asset itself involves anything that puts some cash in your pocket, not wipes it out. Assets that generate income are the goal catches, liabilities are not.
Bad debt occurs when you “invest” in things that lose their value over time. This is also known as throwing money down the drain. That is why you need to aim for those assets that generate income. They will save you plenty of money, open up your real estate investment opportunities, and WON’T drown you.
The Good Debt- Big Yes Yes for Real Estate Investment Shopping
Enough of the bad stuff, let’s get onto the good things. We like to call good debt the kind of debt that allows you to grow your worth. You know what that means: an income generating property gives you the good debt.
There is a common stigma that debt is this big evil monster that is out to get your cash. It only becomes that way if you allow it to. An income property is just one of the examples of income producing assets. The key here is to use funds from banks or other investors to catch yourself a positive cash flow real estate investment.
Related: How Do Investors Make Money in Real Estate if They’re Always Spending and in Debt?
Good Debt and Your Real Estate Investment
Now that we’ve made it clear we are using “good” debt to buy real estate, let’s go over how to use debt to buy real estate. “Money intelligent” individuals use good debt to increase their wealth and worth. They also invest in a positive cash flow real estate investment using other people’s money. Literally. As we mentioned before, these people are either banks or investors.
This concept comes from “Rich Dad,” who stands by his fundamental concept of using OPM, or, other people’s money. He has found that by combining both good debt and OPM, you can expect a jump in those return on investment rates.
The only downside that comes with debt is that normally, you are only allowed to borrow a specific percentage of the purchase price of your income generating property. Normally, a real estate investment property loan will cover around 70 to 80 percent of that purchase price.
So that leaves around 20-30% left on you to come up with. So, you are left with two choices. One, you use your own money, or two, you use other people’s money. With consideration of your real estate investment deal, the more money you can use from other people, the higher rate of return you can expect.
Answer the Question-How to Buy Real Estate With Debt
So let’s get down to business. How does the process of using debt to buy real estate really go? Here are the steps:
Step One: Find Your Real Estate Investment Property
This is where Mashvisor steps in. You want to find just what you’re looking for. For example, one unique technique to use as you search for a real estate investment is Mashvisor’s heat map analysis.
Get the Details: How to Find the Best Investment Property Using a Heatmap
You are able to apply filters to search for your ideal investment property location. This way, you can find your real estate investment with ease. No years of research, just a few clicks and bingo!
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Step Two: Purchase the Real Estate Investment
Once you find the real estate investment that fits your criteria, go ahead and apply for the loan. Here is a useful guide to help you get approved. Then, make the purchase which usually requires a 10% down payment. Once you have that taken care of, leveraging steps in.
Learn More: 5 Ways to Find an Investment Property
Step Three: Utilize Financial Leveraging
This is basically the act of borrowing money from a financial institution in order to own larger income assets with the hopes that you find yourself the most profitable investments (with profits greater than the interest). Let’s say you purchase a real estate investment with a 10% deposit while your investment property loan covers the other 90%.
Say, for example, the real estate investment you purchase costs $500,000. You pay $50,000, as the bank pays the remaining $450,000. If your property increases in value up to $600,000, you just made yourself a $100,000 gain.
Step Four: Watch Your Real Estate Investment Grow
As your real estate investment begins to grow in value, the equity in real estate from this real estate investment can be used for your next property investment. This saves you the time, and money, of having to save up for another deposit all over again. So long as you are able to afford to service the debt, leveraging will help you build those mountains of wealth much faster than if it were to just chill around in the bank.
Step 5: You Could Become a Real Estate Investment Shopaholic
Once you have one real estate investment down, next comes the other, then the other, and the other after that. Just keep following these steps to keep growing the equity real estate mountain. Soon enough, you will find yourself buying investment property number three, or four. You get the point. If you are after the goal of owning multiple rental properties, buying real estate with debt could be one path to take.