No Debt Investing

No Debt Investing

When it comes to making large purchases such as homes or new vehicles, it is almost expected that they buyer will take out a loan that puts them in considerable debt until it is paid off. However, the financial crisis of 2008 opened many people’s eyes to the possibility of being stuck in debt and even going bankrupt if they should lose their job.

So, it is little surprise that there has been a movement towards the no debt strategy which more people are using to make large purchases.

What is No Debt Investing?

Dave Ramsey is a big proponent of eliminating debt completely from your life and with good reason.  The average American household credit card debt is $15,706 and the average household student loan debt is even higher.

No debt investing is a method that does not place you in any debt before making a large purchase. Instead of taking out a loan, you find other methods of raising the money needed to buy what you want so that there is no debt overhang.

Of course, this type of strategy comes with its own set of issues and while it may work for more modest purchases such as a used vehicle, paying for home without taking out a mortgage may seemingly be impossible for most to achieve. A house typically costs in the hundreds of thousands of dollars and managing to make that type of purchase is outside the income levels of most people without a mortgage.

The Downsides to the No Debt Strategy

To take out a loan is not necessarily a bad thing, especially when it provides the cash needed to make large purchases that would take years to save the money necessary. In fact, even if you could eliminate credit cards and other types of loans, people still pay for utilities, food, rent and other expenses on a regular basis. Taxes, health insurance and other payments ensure that you will not live debt-free no matter your current status. There is an old saying that goes there are only two things guaranteed in life “death and taxes”.

So, while there is no technical way to live debt-free, that does not mean you should reject the no debt investing strategy when the occasion calls for it. However, real estate purchases are generally better if you take out a loan to secure the property.  In fact, many times when you purchase a home with a mortgage, the payment will be less than if you rented.

Why Leverage is Good

When you use loans to your advantage, it makes it far easier to not only get the home you want to live in, but also property that you want to invest and sell for profit. Many real estate moguls started off with leveraging their first home purchase and building up their wealth from the profits of each sale. So, even if you start with relatively little money, but have good credit and a steady job, you may actually build up your wealth through smart real estate investing.

The good news is that when you become successful, you can start embracing the no debt strategy for many of your purchases which includes buying a new home. This is because you have used loans to purchase multiple properties that are sold for a substantial profit or you rent out which generates a healthy cash flow.

No debt investing is a smart strategy if you can apply it to purchases that will build up your own wealth. You can also pool your efforts with other investors and purchase properties that offer a very high re-sale value when fixed up or may enjoy considerable cash flow as rental properties.