Owe the Banks MORE than they Owe You

 

 

 

 

 

 

 

 

 

 

 

 

 

John Maynard Keynes, the third most famous Briton after David Beckham and the Spice Girls, said that if you owe the bank $100 it is your problem.

 

When you owe the bank $1 million, it is the banks problem.  In 1988, when Trump bought New York's famed Plaza Hotel, he paid $407.5 million. He got a $425 million loan. "If the world goes to hell in a handbasket, I won't lose a dollar," Trump bragged to a reporter.  

 

While I hate to use Trump as an example of sound financial engineering, I have to give him kudos for this brag. In times of uncertainty and low interest rates, you would be a fool not to leverage up.  

 

Debt is not Lucifer. Financial advisers have spent decades vilifying debt. In the 17th century, Christian's believed that the Catholic Church was the antichrist. In the 18th century, the French believed that it was Marie Antoinette after she told the starving masses that if there was no bread, let them eat cake. In the 19th century it was Napoleon, 20th century Adolf and Joseph (nice name for an ice-cream) and 21st century, the mention of DEBT caused people to lunge for the holy water.

 

Not all debt is bad and not all debt is good. There is good debt, bad debt and ugly debt. Let’s start off with the ugly.  

 

Some credit cards charge north of 30% APR but this does not deter some people from maxing them out and then using another card to pay that one off, and so on until they get into a satanic spiral of debt. Smart people pay on a monthly basis the amount they need to avoid interest which means they can get up to 40 days of free money.  

 

Now for the bad debt. This is when people borrow against the equity in their home. This turns your home into a liability - because it takes money out of your pocket as you make the monthly payments without receiving any income. Your only hope is that the house price appreciates - but that means getting into the game of property speculation.  

 

Now you have the good debt. This is where you use the debt to buy assets that generate rental income. The interest on the debt is tax deductible and the debt allow you to generate cash flow which puts money into your pocket. The key here is using the debt to acquire high quality assets that generate a reliable cash flow.