Debt Has a Bad Rep. Here's Why Graham Stephan Thinks It's a Good Thing
Many people are afraid to borrow money because they think debt is bad.
Graham Stephan believes debt can be a good thing, however.
The real estate investor is millions in debt and he believes borrowing can help you grow wealth.
If you're hesitating to borrow, you may want to read about why Graham Stephan is in favor of debt.
Being in debt is often considered a bad thing, especially by some finance experts like Dave Ramsey.
But real estate investor and finance personality Graham Stephan has a really different attitude. In fact, Stephan has indicated that while he's often criticized for borrowing a lot, he's happy to be in debt to the tune of $4 million.
Stephan has gone so far as to describe his debt as "the key to my wealth," and said, "I still wouldn’t pay off any of my loans early." So why does Stephan think borrowing is good? Here are a few key reasons.
Debt can grow wealth
Stephan likes debt because of the fact that some types of borrowing can actually make you money rather than cost you money.
He explains there's two types of debt and that one type, "debt taken for acquiring assets," is an investment that can make you richer in the end. And he said that as long as you can tell the difference between debt that makes you money and debt that costs you money, there's nothing wrong with borrowing if it helps you acquire assets that will produce returns for you.
You can profit off the margins
Stephan also explains that if you can profit off the margins, debt is a good thing. As a simple example, he explains that if you could get a $100,000 loan at 0% interest, you'd always want to take it because you could invest in any asset and repay the loan while keeping the returns your money made.
He explains that while a 0% rate isn't available to most people, you can still profit off the margins when you get a reasonable loan rate, such as being able to borrow at 4% like you can with a mortgage if you are buying real estate. "If you have some experience with real estate, you could invest in a property that would appreciate at 7% over time, and the 3% difference is your profit," he said.
So if you can borrow at a low rate, invest the money, and make enough from your investment to pay your interest and keep some profits, Stephan thinks you should do it -- as long as you're aware of any potential risks and work to mitigate them.
Inflation is your friend when you have debt
Finally, Stephan likes debt because debt makes inflation work for him. "You get to pay off the expensive debt of the past with the cheap money of the present," he said.
He explained that each $1 million in debt he has taken on is reduced by $75,000 when the inflation rate is 7.5% because the money he's using to pay on his loans is worth so much less in real terms.
"The rates at which I locked in my debt are much lower than what they would be due to inflation, so though my money has less purchasing power considering the current prices, my past debt is easier to pay off," he notes.
He advises against repaying loans when inflation is high as it is now, and he's correct that it doesn't make sense to devote extra money to paying down loans when your money is losing value every day.
Ultimately, Stephan is right about all three of these points. If you can borrow responsibly to acquire assets that grow your net worth, there's no reason not to.
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