Debt – Leverage or credit

These three terms are often used interchangeably. However, they actually have subtly different but important distinctions in the context of real estate. 

When we use the term leverage we’re talking about borrowed money that’s used to purchase a home or property but more specifically, it’s providing a mechanical advantage to increase equity. In other words, if you borrow money to purchase a home or property and that money is paid off over time as a mortgage by you or someone renting the property, you’re getting the mechanical advantage of time and possibly rental income paying your mortgage down. Over time you’ll owe less and ideally, it’ll be worth more than when you started. 

Debt can be used to purchase something that doesn’t necessarily increase in value over time. Think of debt as a way to purchase a car or boat or house or golf clubs. By the time you’re done paying off the debt, the thing you used it for may or may not have greater value. 

Credit, like line of credit, a HELOC or even credit cards can be powerful and flexible but using carelessly can get you into a position where you owe money but have nothing in the works to help pay it back. For example, if you use a HELOC to purchase an income property you may gain a monthly rent check but there’s no mechanical advantage to pay it back. At the end of the terms for the HELOC you’ll still owe the same amount.