The idea of using debt to become wealthier than your peers seems a little strange. After all, aren’t most people who go into debt poor?
It turns out that the distinction here lies in the type of debt you choose to take on. If you’re going into debt to buy cars and holidays then, yes, that is likely to make you poorer. But if you’re doing it because you want to acquire income-generating assets, then that’s a different story entirely.
So, how can you use debt to become wealthier than your peers? What strategies are available to you? Let’s find out, shall we?
Maintaining A Healthy Debt-To-Income Ratio
The first thing you’ll want to focus on is your debt-to-income ratio. The lower this is, the better (and the more headroom you have for taking on additional debt).
Some investors, like those in real estate, can take on massive debts because they also have substantial incomes. However, it depends on how much money is coming in. Debt-to-income relies on having an increasing income to support an increasing debt. The difference is where wealth is generated.
For this reason, you’ll want to monitor your debt-to-income ratio. Most property investors try to stay below 75%, although this is easier said than done.
Sometimes, your DTI ratio will spike because of the purchase of a new property or void periods. Therefore, you’ll want to calculate it periodically to identify patterns and trends and see which way you are going. Most investors begin on the higher end of the DTI scale and then lower it as they start to achieve their lifestyle goals.
Avoid Overleveraging Pitfalls
At the same time, you will also want to avoid some of the more common overleveraging pitfalls. While debt can be helpful for obtaining assets, it is also a problem when it gets too high, especially when economic conditions change. If you have too much debt, it can lead to financial instability and poor cash flow, leaving you far worse off than you would otherwise want to be.
Therefore, check the interest rate predictions regularly. Try to find out whether you can withstand rising rates and what they mean for your overall strategy.
Where possible, plan for worst-case scenarios, especially if you are an unsophisticated investor who doesn’t understand interest rate dynamics. You don’t want to get into a situation where you buy a property thinking you can afford it on a variable interest rate mortgage, only to later discover that you can’t.
Ensure you keep plenty of money in reserve, too. Building a property business is something that should take years of consistent effort.
Make Use Of Credit Perks
Another strategy to use debt to become wealthier than your peers is to use credit perks. Working out where you can get the lowest rates often allows you to borrow more competitively than everyone else.
Start with business credit cards. These often offer the lowest rates for short-term borrowing, with options to transfer from other cards where necessary.
If you can open a line of credit for your business, that also helps. These facilities allow you to continue attracting capital to your firm to pay for essentials if you think your venture will be profitable soon. You can also tie the borrowing to your business entity, reducing the private risk you face.
Consolidating debt is also a strategic way to use credit. Bundling everything together into a lower-cost loan secured against a fixed asset, like a property, can help you when you get into financial trouble and can no longer maintain your current set of living arrangements. Bringing debt into a single service is usually useful.
Work With Experts
It also helps to work with experts serving your area. If you can get local knowledge on how to use debt effectively, say, in the real estate market, that can be tremendously helpful.
Usually, people on the inside of industries have vastly more knowledge than those on the outside. They often have a clear vision of what’s going on and how property investors should behave if they want to get ahead of the competition.
Experts are also known for their candidness. If they think you are taking on too much risk or have excessive debt, they will let you know. While your ideas might look good on paper, they can point out the flaws in your arguments and what could, potentially, go wrong.
Invest In Yourself
You also want to invest in yourself with education and training. The return on investment for gaining knowledge and building skills can be high to exceptional, allowing you to increase your earning potential.
In these cases, going into debt might be worthwhile. Paying a lot of money for a course that lands you a high-paying job in the future can be an excellent way to earn even more, allowing you to pay back the debt.
Going to college is one option, but you need to make sure you choose the right course. You want to come out of the other side believing that all the debt and effort was worth it.
The other option is to seek professional qualifications that are in high demand. These are highly sought-after and excellent ways to improve your overall standing. Often, you can double your salary in a few years, even after tax, when you pick the right path to go down.
Expand Your Business
You can also use debt to become wealthier than your peers by leveraging the additional capital to expand your business. Sometimes, you need to scale fast if you want to be the individual who wins the game.
Expanding your business is usually relatively easy to do if you have people who believe in you and your ideas. However, it is critical to get investors on board with your plans early so they can also benefit the most from what you want to achieve.
If you can’t do that, then you want to work with institutions that can provide lines of credit. Borrowed money can go into activities that produce a return on investment, proving your concepts to lenders and getting them to give you more money in the future.
Again, though, you’ll need to focus on your debt-to-income ratio. If it goes too high, it could signal trouble ahead for your firm.
Use Debt To Buy Real Estate
Of course, one of the best ways to use debt is to buy real estate. The more properties you can purchase, the more income you will generate, and the more you will earn.
Start by putting a downpayment together–some money you can lay on a property. Then, look at where you can borrow to build a real estate portfolio. Try to find out how you can generate more rental income from existing properties and use that to support mortgages on new ones.
Most lenders will provide novices with three to four mortgages on viable properties. Usually, you will need to demonstrate high equity or competence to take out more loans than that (since the systemic risk becomes much higher for mortgage lenders at that point).
When using debt, focus on properties offering decent appreciation. The more they can rise in value over time, the more you will eventually make when you cash out.
Understand Good Debt
Lastly, it is worth understanding “good debt” if you want to be wealthier than your peers. Putting money into income-generating assets is always the way to go, not just into things like luxury goods and credit card debt, which can eat away at your wealth.
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