The vast majority of financial advisors will tell you that debt is bad. And in many cases, that’s true. If you are struggling to make payments each month on your credit cards or student loans, then you need to address that.
But if you are in a situation where your personal debt is under control, you can use debt as a potent wealth building tool.
Here's an example to illustrate the point:
If you have $100, you can buy an investment that costs $100. If that investment makes 10%, you now have $110. But if you have a $100 and use that as a down payment or a source of collateral to buy an investment that costs $1,000 and that investment generates the same 10% return, you now have $200.
That’s a 100% return vs. a 10% return.
It’s an oversimplified example, but I use it to show how someone who understands and uses debt in the right way can magnify their returns.
I have used this basic principle to grow my net worth from a negative amount to millions. Ok, so that's the principle, but I am sure you want the secret sauce, the ninja stuff. We'll cover all of that in detail, but here's a preview.
The best strategies to leverage debt and grow your wealth are:
- Buy rental properties with mortgages
- Borrow through business entities you create
- Use margin accounts to buy securities
- Use cash back credit cards
- Use student loans to get a better paying job
- Refinance high interest rate debt
- Use lines of credit to capitalize on opportunities.
As mentioned above, I will discuss each of these strategies in detail below, but I think it's really important to also go over some of the risks that you need to address when using debt to increase your wealth. So we'll do that too.
Debt can be incendiary if misused, so it's critical to know the dangers and mitigate them when possible.
We've got a lot to cover, so let’s get into it.
This post may contain affiliate links. If you click on a link and complete a transaction, I may make a small commission at no extra cost to you.
The information contained in this post is for informational purposes only. It is not a recommendation to buy or invest, and it is not financial, investment, legal, or tax advice. You should seek the advice of a qualified professional before making any investment or other decisions relating to the topics covered by this article.
Buy Rental Properties With Mortgages
This strategy is the single biggest contributor to my wealth. I have been investing in real estate for years now and currently own nine investment properties. I bought all of them using mortgages from banks and individuals.
In my case, I had to put around 20% down, but these days lending requirements have loosened and you only need to put 15% down. That means for every dollar you have, you can buy $6.67 of real estate!
Why is this strategy such a potent wealth building tool? Because it combines the power of leverage with the cash flow, stability, appreciation, and tax advantages offered by real estate.
I am still surprised when people ignore the power of leverage when used in the context of real estate investing. I hear all the time how real estate underperforms the stock market. Now, I have nothing against the stock market and have a large portion of my money invested there, but I think this claim of underperformance is just not true when you factor in leverage.
Here’s an example contrasting real estate investing vs. traditional stock market investing:
Kevin has $100,000. He invests all of it in the stock market and receives a 10% return per year (this has been the long term average return of the S&P 500). At the end of 10 years, he has $259,374. Not bad!
Kelly also has $100,000, but she chooses to invest in six rental properties, each worth $100,000, and puts a 15% down payment ($15,000) on each of them. This leaves her with $10,000 to serve as a cash reserve in case she needs to cover any expenses associated with her rental portfolio.
Her combined mortgage amount is $510,000 and her properties are worth $600,000. Let’s assume a mortgage rate of 3.5% (which is actually above market as of the time of this writing) and an appreciation rate of 3.7%, which is the rate of appreciation for average home values over the past 20 years.
At the end of 10 years, her properties are worth $862,857. Her combined mortgages equal $394,877. If you subtract her mortgage from the value of her properties, she has $467,980. Real estate wins and it’s not even close.
And this does not take into account all of the “cash flow” that Kelly has been receiving on her rental properties for 10 years. Cash flow is just rental income minus expenses (like mortgage payments, taxes, insurance, HOA fess, etc.).
Side Note: One of my requirements when buying rentals is making sure that the property will have a healthy cash flow. I never violate this requirement – it is essential if you don't want to get burned (more on this later).
On average, my rentals generate between $100 to $200 per property in cash flow each month. In the example above, if we assume Kelly made $150 in cash flow each month for each of her properties, she would have made a little over $100,000 over ten years. To top it all off, much of that cash flow could be insulated from taxes due to her ability to deduct depreciation as well as other expenses relating to her rental properties.
Imagine she had invested that $100,000 into the stock market or into real estate again to further enhance her returns?
I think you get the picture. This is a powerful wealth building strategy and it's what put me on a different wealth path.
Risks of Buying Rental Properties with Mortgages:
As with any investment strategy, there is risk. The biggest risks of buying rental properties with mortgages are:
- You buy the wrong property in the wrong neighborhood and suffer losses (e.g., declining property values or big repair and maintenance bills because of poor condition).
- You get a bad tenant that will not pay the rent or will trash your property.
- You default on your mortgage due to vacancies or other expenses.
Now, you can mitigate many of these risks by conducting really solid due diligence before you buy your property. This includes selecting the right neighborhood, making sure the property cash flows, screening your tenants, and putting in place strategies to reduce vacancies.
Once you learn how to manage these risks, you are on the path to real financial success.
In my opinion, this strategy is the secret formula for getting rich. It's just a basic arbitrage. You borrow other people's money to buy an income producing asset. If the income from that asset is more than your loan payment, you keep the difference.
The beauty of this strategy is that you can replicate it. Buy one property and learn how to manage it profitably. Rinse and repeat. Before you know it, you will have a rental property empire.
Related Reading: If you want to learn more about this strategy, check out my step-by-step guide on how to get started investing in rental properties.
If you want to learn more about how to manage the risks of this strategy, check out my articles on these topics:
- Selecting the Right Neighborhood and Cash Flow Research
- Tenant Screening
- Best Ways to Reduce Vacancies
Use This Strategy For Other Income-Producing Assets
At its core, the strategy we just covered simply involves buying an income producing asset that covers your loan payment and leaves you some profit. So there's no reason why you can't apply this strategy to other assets.
Rent Out Cars to Make Money
One example that comes to mind is cars.
If your credit score and financials are good, you can obtain really great financing (even up to 100%) on car purchases. You can then use that car to make money by renting it out on car sharing platforms like Turo and Hyrecar.
How much can you make doing this?
According to Turo, if you list one car on Turo, you can earn an average income of $10,516. That works out to around $876 per month. In most cases, that should be able to cover your monthly auto loan payment.
But if you want to do a more detailed analysis of whether you can make money listing your car on Turo, check out their Carculator. Through this tool, you can see how much you can make on Turo for various car models.
You can then figure out how much it would cost to buy that car and how much the monthly payments would be. If that car can generate more money for you than its associated loan payment, you may have a winner.
Of course, the statistics from Turo are averages, so nothing is guaranteed, but there are plenty of people making money this way.
Rent Out RVs to Make Money
Cars are just one example. You can do this with RVs too. RVShare is like Turo, only for RVs. RVShare claims you could earn up to $22,000 per year doing this. This can be a perfect side gig if you already own an RV because, unlike your car, you are not using it all the time.
But if you want to get more serious about this strategy, you can. There are plenty of people who buy a fleet of RVs and run this like a business for real money.
Rent Out Other Income-Producing Assets
You can apply this strategy to a variety of other income-producing assets.
Some really interesting ideas that you may want explore include:
- Vending machines
- Bounce houses
These money-making assets can all be easily purchased and financed. Buy them, finance them, and profit from them. You can start with one, learn how it works, and then grow a business out of it.
If you want to learn more about any of these alternative income-producing ideas, check out my articles below. I provide a step-by-step guide on how to get started in each of these side businesses (and make them passive to boot).
Borrow Through Business Entities You Create
I love using LLCs in connection with my businesses. For example, I set up an LLC to purchase real estate. Three of my rental properties are held through that LLC. I used money in my IRA to fund the LLC, which then purchased those properties.
Related Reading: If you want to invest in rental properties using your IRA, there are some pretty specific rules you need to follow (like setting up a self-directed IRA and following certain IRS guidelines). If you are interested in learning more about this investment strategy, check out my article on this topic.
LLCs Multiply Your Borrowing Power
LLCs (or any similar type of business entity) can be a great way to grow your wealth because each LLC is a standalone entity that can borrow funds to grow the underlying business.
Think of the possibilities here. If you establish just one LLC in connection with one of your side businesses (e.g., your real estate business, vending machine business, etc.), you will start building a credit profile for that business. That LLC will be able to borrow money from lenders and use that money to buy income-producing assets (if that's the nature of your business).
The more income that the LLC generates through those assets (and the longer it is in business and faithfully paying off its loans), the more credit worthy it will become. That means the more it will be able to borrow and further grow its asset base.
That's for one LLC. Imagine if you do that for several. You can very rapidly grow your businesses (and ultimately your wealth).
LLC Debt is Not Counted as Personal Debt
Another added benefit of this borrowing strategy is that you won't be affecting your personal debt levels. This is important because of the debt-to-income (DTI) ratio, which is just how much debt you have compared to your income. If your DTI is too high, you will have a hard time borrowing using your personal credit.
If a lot of your debt is through your LLC, your personal DTI can remain at a healthy level. This means you can keep getting approved for loans to buy properties (or other income-producing assets) in your own name.
LLCs Can Protect Assets
Finally, an LLC is a terrific way to protect your assets because if you establish and maintain your LLC properly, any claims arising from your LLC's business cannot affect assets that are held outside your LLC.
You shouldn't neglect asset protection. Whether it's through an LLC or insurance, you should make sure that your assets are insulated against liability claims.
Related reading: If you want to learn more about using LLCs in your real estate business and how they can protect you, check out my article comparing LLCs and umbrella policies.
Use Margin Accounts To Buy Securities
Another debt leveraging strategy I have used to increase wealth is trading on margin. This may be a new concept for some readers, so let’s cover the basics of margin accounts.
What Is a Margin Account?
The basic brokerage account only allows you to buy investments up to the amount of cash you have in the account.
But if you apply (and are approved) for an upgrade of that account to a margin account, then you gain access to what is essentially a line of credit from the broker that can be used to buy additional securities.
You can typically borrow up to half of the total purchase price of the investments in your account (as long as those investments are eligible for margin). Source: Schwab.com
Eligible investments normally include stocks, bonds, ETFs, and mutual funds.
How Does a Margin Account Work?
A classic example of how someone uses a margin account is as follows.
You have $10,000 in cash, but want to buy $15,000 in stock with a $500 share price. Using margin, you buy 30 shares equal to $15,000, instead of 20 shares equal to $10,000.
If the stock rises to $1,000 per share, you have made $20,000 off your $10,000 investment. If you had not used margin, your profit would have only been $10,000.
But margin can cut the other way.
Let’s use the same example, but in this case, the stock price drops to $250. Now your loss is much greater than it would have been if you did not use margin.
Instead of losing $5,000, you have lost your entire $10,000 because the value of your stock is only $5,000 and you still owe the broker $5,000 (plus any interest that has accrued on the loan amount).
This is a simple example to illustrate the point about how leverage can cut both ways. The actual mechanics of how this would play out in real life is likely to be different.
This is because there are certain “maintenance margins” that must be satisfied and they kick in well before your stock drops by 50%.
If your stock price declines too much, your broker will issue a “margin call” where you have to deposit more money to satisfy the maintenance margin. If you don’t, the broker can sell some or all of your stock to pay down your loan.
It’s a real risk and I have been on the receiving end of a margin call. It’s brutal. But, as you learn and get better at investing, you can start to prudently use margin to amplify your returns.
I occasionally use margin to increase my position in a stock when I think it is undervalued. With some brokers offering very low interest rates on margin accounts, this can be an effective way to magnify returns.
But I would not go overboard. If you are new to this, I would use a conservative amount of margin (say 10% max) so that you don't have a high risk of getting a margin call.
Related Reading: You can use margin accounts to buy real estate as well. It’s a little known strategy, but one that can be used to grow your real estate portfolio when you don’t have other sources of funding. If you want to learn more, check out my article on the topic.
Use Cash Back Credit Cards
This is a pretty obvious strategy and it won’t make you a millionaire, but I use it to make a few thousand bucks each year. Basically, I try to put as many of my purchases and expenses on my cash back credit card. If your credit is pretty good, you can usually get one that pays you 2% cash back.
You can grow your wealth by getting one of these cash back cards and investing that money. You can apply this money for any purpose, including reducing personal debt, saving for college, investing for retirement, etc.
Of course, you can only use this strategy if you pay off your balances each month. Otherwise you will pay interest on those balances and that will wipe out any benefit from your cash back rewards (and then some).
Use Student Loans to Get a Better Paying Job
Student loans have been maligned for many years. And let’s face it, no one likes paying them back. But if you don’t have the means to pay for college or graduate school, getting student loans may be your only choice.
This was the case for me. I had to take out loans to get my undergraduate and law school degrees. Combined, the loans were well into the six-figures. But I knew (or at least hoped) that it would pay-off. Fortunately for me, it turned out ok. I quadrupled my income once I graduated and continued to earn more as I progressed in my career.
Like any other investment, getting a student loan was a calculated gamble. I am not going to lie, the thought of paying back a huge student loan made me study harder and gave me a ton of motivation during school.
That motivation carried through to my professional career and continues to this day.
Investing in your education is one of the best strategies I know to advance your wealth over the long-haul. But you have to get the right sort of education. This is obvious, but if you want a good ROI on your student loans, you must get a degree that will elevate your earnings once you graduate.
Paying off my students loans has been painful, but I don’t regret the decision for a second. It was the only path I had available to a better career and I gladly took it.
Refinance High-Interest Rate Debt
Another way to use debt to improve your finances is to swap out high interest rate debt with low interest rate debt.
Credit cards immediately come to mind. The average credit card interest rate is 14.65% according to the Federal Reserve. Compare that against other forms of debt, like student loans (avg. of 5.8%), car loans (avg. of 5.27%), and mortgages (avg. of 3.99%).
As you can see, credit cards are by far the worst offender when it comes to high interest rate debt, so they should probably take priority.
So how can you swap out high interest credit card debt with low interest debt?
You can look into balance transfer offers as a start. They often come with promotional rates for a period of time, so you can pay down the balances with little or no interest during the promotional period.
There are other options as well. You can try peer to peer lending, a traditional bank loan, a HELOC, or a cash-out refinance. You can even borrow money against your 401(k) to pay off these high interest loans (although that comes with its own set of risks).
The benefits of this strategy are obvious – you can save a bunch of money on interest.
Refinance Your Student Loans
You can also save money by refinancing your student loans. I did this a while back for my law school loans. I refinanced with SoFi and it has really made a difference.
My rate wasn’t that bad to begin with, but they were able to offer me something much better. I kept the payment the same, so it had no impact on my budget, but I have been clearing away the balances much faster.
If you are interested in refinancing, check them out in the link below.
Full Disclosure: You will get $10 just for checking out their offer (no hit to your credit either). I will get $10 too. If you refinance your student loan with them, you (and I) will both get an extra $300.
Use Lines of Credit to Capitalize on Opportunities
My final debt strategy is to use lines of credit to capitalize on investment opportunities. Warren Buffet famously said:
When it's raining gold, reach for a bucket, not a thimble.
This is probably my all-time favorite money quote. This principle has guided some of the best financial decisions I made.
I think most people will probably see a handful of truly exceptional investment opportunities in their lifetime.
For me, there are two that stand out. The first is the financial crisis of 2007-2008. During the years immediately following the crisis, people were terrified of real estate. Short sales and foreclosures were common and real estate prices had dropped dramatically. Mortgages rates were at all-time lows.
I saw the opportunity to snatch up real estate at great prices with low-rate financing. I was no sage here. A lot of other people saw this, but most did not act.
For me, it was a burning conviction. I went all-in. Other than my 401(k), I moved all of my assets into real estate. I reached out to potential partners who might want to invest with me when I ran out of personal funds. I found creative ways to invest in real estate through my IRA.
Needless to say, the real estate market completely rebounded (and more) since that time.
The second time was the 2020-2021 pandemic. Prior to the pandemic, I had been sitting on a pile of cash and available credit because the stock market seemed overvalued to me back then.
When the market disruption occurred in March and April of 2020, I saw the opportunity and invested aggressively in the energy and banking sectors, which were really getting beat-up at the time. I should have bought into the travel sector too, but didn’t.
In any event, as of this writing those sectors have completely recovered and the bank stock that I invested in most heavily is hitting all-time highs. These gains transformed my net worth a second time.
I am not writing all of this to brag. I am absolutely not some investing genius. There were plenty of opportunities that I missed that millions of people capitalized on (Tesla, crypto, the list goes on).
My only point here is that you want to have dry powder ready when the times comes. These types of opportunities may only come once or twice in a generation and you have to be ready for them.
One way to do that is to have a line of credit, such as a HELOC. You won’t be paying any interest as long as you have a zero balance, but you can draw on it when needed for your next blockbuster investment. In addition to my HELOC, I also like to keep at least 10% of my assets in cash for extra buying power.
So there you have it – seven strategies that use debt to magnify your wealth.
Of course, it goes without saying that you should be careful anytime you use debt, but if you find an investment opportunity that is relatively low risk, using leverage to invest more in that opportunity can be a great way to amplify your returns.