Many of us have heard these terms repeatedly, but what do they really mean? This concept is actually a fairly simple one, once you get the hang of it. Here is the most basic definition:

Good Debt: debt that is putting money INTO your pockets.

Bad Debt: debt that is taking money OUT of your pockets.

Too simple to be true? Well, let’s examine the basics of this concept first. Many people are quite attached to what their parents, and their parents’ parents, have taught them, and this is a bit different. If you use this definition, your own home is counted under the “bad debt” category, since it is taking money out of your pocket each month (for things like mortgage, utilities, repairs, etc.) But, don’t take this the wrong way. This doesn’t mean you’re doing something “bad” – on the contrary! It just means your home isn’t putting money INTO your pockets.

What kinds of things then, are Good Debt? Any debt (other people’s money that we’re borrowing) that puts money into our pocket. Some people own businesses that do that. Here, we focus on Real Estate. The idea with real estate is that we borrow money (mortgage) and use that money to earn equity, tax benefits and sometimes cash flow. Specifically buy residential or commercial real estate and rent the space out to someone. So, in essence, they are paying for at least part of your mortgage each month, and ideally over a period of time, pay off the debt.

Besides the rental income from your agreed upon lease, there are other financial benefits to figure into the equation as well. Everyone pays taxes every year, often having them deducted right off their regular paycheck to avoid the pain of the “bill” at tax time. Real estate is a great way to lower that monetary burden. Frequently investors even drop a tax bracket when calculating all their deductions, mortgage interest frequently being the largest. Also 1/27 of the value of the property itself is deductible, as well as other expenses, repairs and upgrades paid throughout the year. And how can that impact you monthly? If you are a W-2 wage earner, you can often change your paycheck deductions to have less taxes taken out each week.

At the end of the day, the concept of building wealth, is simply a function of reducing your “Bad Debt” and increasing your “Good Debt” to the point where you are simply paying down your total debt using the income generated by your investments.

But remember: you cannot make a dime in real estate investing until you buy some real estate. Choose what type of real estate you will purchase and write down what your long term goals are. Share those goals with your lender, your Realtor and anyone else on your team of experts – they’re there to support you. Choose people who are already doing what you wish to do and use their experience and advice. You can learn a lot from their experience.

Author: Alex Anderson is a licensed RE/MAX Advantage Plus Realtor who specializes in helping people to buy wealth-building Investment Property in Minnesota