We have millions of dollars in debt and we’re not freaking out, even though it sounds like we should be. As real estate investors, we use debt as leverage as our superpower. In this video, we’re going to discuss exactly what we mean and also begin to address our relationship with money.
A Different Way to Think about Debt: Use Debt as Leverage
Like all superpowers, leverage can swing both ways. As moms, we have superpowers in different ways that can be either negative or positive. For example, our ability to unconditionally love our kids is a superpower, but if we devote everything to them and leave nothing for ourselves, we can’t show up as our best selves.
When we start exploring our relationship with money, we often need to work on how we think about money and debt. We often think of debt as a bad thing, and it can be when used incorrectly. Many of you might have parents or follow leaders like Dave Ramsey who advocate for no debt and everything in cash. However, that approach has its downsides as well, because leverage is essential to capitalize on real estate. As real estate investors, leverage is what gives us power. It can be both good and bad. When used incorrectly, it can hurt us, but when used correctly, our returns can be infinite. Debt can be a superpower.
Is All Debt Bad? Relationship with Money and Debt
You may live with a fear of money or borrowing money. It might have been ingrained in you from childhood that debt is bad, or you may have had a bad experience with debt. We all can think of a bad experience we’ve had with debt, which diminishes our confidence and makes us fearful in future transactions.
For instance, maybe in college you bought a couch or TV with no interest for 12 or 24 months, or perhaps you bought a new car with debt and it depreciated immediately. Or maybe you invested in real estate without doing your due diligence, hoping everything would turn out well, but it didn’t. It’s natural to have fear. As investors, we think differently about credit and leverage. We realize it can be used safely and effectively. We also realize that without leverage, we can’t get deals done.
How to Use Debt to your Advantage
Let me give you an example. We bought our first building a few years ago for around a million dollars. With all the updates, it was vacant at the time, which was scary. It was right at the start of COVID, but we had done our research. It was in our local market, in an awesome area, and we had cash reserves in case something went wrong. Having a solid plan helped with our fear. We couldn’t have bought this building without leverage. We put $200,000 down and the bank carried the other $800,000, allowing us to buy the property. We found a tenant who paid our mortgage and operating expenses, and we made money from it. Without leverage, we wouldn’t have been able to do this.
We have to think of our money like banks do. When we put our money in a savings account, we don’t even get a 1% return, while banks lend our money at higher rates. We need to think like banks and leverage their money to earn returns. If we don’t learn to leverage our money, we won’t have enough to retire comfortably. Stockpiling cash without investing it means losing money over time.
We need to invest the money we earn to create lifetime returns. Kyle, Amanda’s husband, is a perfect example of someone trading time for money. Our goal is to invest that money to earn back time to spend with family instead of continuing to exchange time for money.
Your Next Step for Real Estate Investing
Take five minutes to write down your fears about debt or leveraging money. It starts with awareness and rewriting your relationship story with money.
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