How I Used Debt To Build Wealth

10/20/2016 11:21 pm ET

This post originally appeared on Everybody Loves Your Money

not fear risk. I have failed many times and I am not afraid to pick myself up again and try once more. So when it comes to wealth building, I have actually taken more risks than your average saver and investor to get ahead faster.

I took on a lot of debt to invest. Because of my line of work, and the fact that I mostly work abroad, I am not easily getting credit. Still, I got a few personal loans, some 0% credit card advances, loans from my mom and even a couple of friends, to invest.

You can’t repay those in small installments over the next 30 years like you would your mortgage. So every month, I had to find quite a bit of money to make these payments. That was the first extra push to build wealth. I was forced to hustle hard to keep the bank and my mother happy.


A classic way to use debt to build wealth is to invest in real estate.  I bought agricultural land, raised cattle and even bought a house, that I hoped would give me a greater return than the interest I was paying on the loans.

Yes, even my mom needed 4% on her money. She offered to lend it to me for free, but I refused, since she was getting that much on her high yield savings account, and I found it unfair not to pay at least the same. It was a risky approach. But I was confident in my ability to make money. Even more, it was the extra motivation I needed not to get too comfortable.

While this is definitely not for everyone, most people do the same when they buy a house. They use leverage to buy a more expensive asset. Let’s have a look at some numbers.

If you have $20,000 in savings, they probably make you $200 per year on a 1% savings account these days. If that.

You could buy a $100,000 house with 20% down. The bank lends you $80,000 at 4% over the next 25 years, so your mortgage will be $422.

Say you can rent the place for $422. The first month, $267 of that amount will go to the bank to pay interest, and $155 will go to pay of your $80,000 debt. A $155 monthly return on your $20,000 deposit is a 9.3% annual return on your money. As your debt shrinks, every month you will repay less interest and pay off more principle, increasing that return on cash.

I am purposefully oversimplifying this example, as I didn’t include taxes, repairs, maintenance and vacancies. But if you rent for a little more money so you can cover all these expenses and have a property that breaks even every month, 25 years later, your tenants will have paid off your property. And your $20,000 will have turned into $100,000.

Plus, the house you bought today was worth $100,000. It could be worth $209,300 25 years from now if housing prices rise 3% every year. Unless a big market crash happens, delaying a house purchase so you can go all cash usually means buying a more expensive property down the road. And it still keeps cash flowing $422 a month, now without a mortgage.

In the meanwhile, your $20,000 at 1% will have turned into… $25,648. Wow. Not much at all.

Leverage immediately increases your return on investment. But it increases your risk accordingly. If you buy a property for $20,000 cash, it can sit empty, and you don’t owe the bank a thing. With an empty $100,000 property, you still need to find $422 every month to pay your mortgage off. Or risk a foreclosure.


Leveraging equities is another way to use debt to build wealth.  Leverage can be used in trading index funds and stocks, where instead of buying one share of the S&P500, now trading around $2,100, you can invest just $210, and trade the rest on margin. If the index goes down $210, you are wiped out and have lost all your money. Margin trading is very dangerous. At least when you leverage a house you still have a tangible asset. But trading on margin can be very lucrative too. If you forecasted correctly and the index goes up $210, you have just doubled your investment. Never invest money you can’t afford to lose if you are going to take that kind of risk.

In general, I like real estate better, because you can always resell the asset, make money on appreciation or improvements you made, on top of just the rent. When I took on that debt to invest, I was a renter, and I thought worst case scenario, I can live on my property and pay the rent amount to my mother. Knowing she was my safety net and would never foreclose on me also helped me accept a higher level of risk. It all went well, but again, it is not for everyone.

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