How The Wealthy Use Debt

To increase buying power

Simply put, instead of buying one asset with all cash, you could use the cash as a down payment and use debt (borrowed from an institution or bank) for the remainder of the purchase price, giving you the ability to purchase a more valuable asset or multiple assets.?

For example, if you had one million dollars:

- Purchase one asset valued at $1M with NO debt

- Purchase one asset, valued at $4M = $1M down (25%) and borrow $3M of debt (75%)

- OR purchase multiple properties using the $1M as down payments and leveraging debt to satisfy the rest of the purchase price at whatever loan-to-value ratios make sense.?

To increase diversity

If you have a single asset and possibly one tenant, you have single asset risk. That means all your eggs are in one basket. If that asset or area takes a negative economic hit or a natural disaster affects that geographic area, one hundred percent of your investment will be affected.

If you were able to invest in multiple assets, different asset classes, and/ or geographic regions, the risk would be spread out across various assets and areas. Our Advantage Fund was specifically formed with the intent of spreading out risk and protecting investor capital across regions, asset classes, and asset types.?

To maintain liquidity

Using debt, you can maintain some form of liquidity. This simply means you will only need to use a portion of your capital to purchase an asset versus using it all, or most, by not using debt. By leveraging debt, you can keep some buying power for future opportunities, showing lenders you have capital at hand to get loans or just having it for that rainy day fund.

Example:?

If you have $1M and want to buy a $1M asset with all cash, you’re out of cash and lose future buying power, diversity, and available liquidity.?

To get yield spread

In this instance, yield is described as the spread between the amount of money it costs to borrow debt (usually represented by a percentage) and the net revenue generated by an asset. In a ‘normal’ market, you can put your money out (by investing in real estate) at a higher return than what you can borrow from the lender.

You can achieve this by actively investing, acquiring an asset doing due diligence, and overseeing its operations. Or by passively investing, find an ethical and responsible investment firm that does all of the above for you under some sort of compensation structure.?

To increase tax benefits

Using leverage, you can increase your tax write-offs like interest write-offs and depreciation.?

In conclusion, some debt is bad and should be paid off or consolidated such as revolving high-interest rates and personal debt. But some debt can be used to your benefit, and if used and leveraged correctly, you can build wealth, net worth, and passive income.

Dual City Investments is a commercial real estate investment firm built on fidelity and integrity while focusing on providing private equity investment opportunities with investor security as our priority. Our firm’s mission has been to produce consistent investment returns through a systematic approach across investment real estate and specialty asset classes.

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