Have you ever thought that can we make money from debt? You might hear the phrase debt is the root of all evils. Never get into debt. Debt is like slavery and that is true to a certain extend. Because when you are drawing in debt, your life is over. And also sometimes debt leads to suicide also.
While you are trying to pay your debts, your debts are not waiting for you. They are growing day by day since no one lends money for free. There is always an interest. Despite all of this, The United States has embraced debt.
It’s almost 15 trillion dollars, which brings the average household debt to over $5315. The US GDP is a little over 21 trillion dollars. Which the entire economy consists out of debt.
But there is good news that you should know. Debt is not always bad. That is an unpopular opinion because most of the debt we have is bad debt. You probably have some credit card debts, a car loan, and maybe a student debt, and you are thinking like it will take you decades to pay off all of these debts.
How on earth can debts be something good. In order to understand how debt can be something positive, let’s take a look at how people’s deep pockets still use debt to make even more money. It might sound a bit confusing to you. Because why would anyone with a lot of money use debt in the first place.
Debt is supposed to be used by people who do not have money. But that’s not how capitalism works. Debt is a powerful tool if you know how to use it. And in this article, you’ll get to know how rich people use debt to make even more money. Let’s see how to make money from debt.
1. Make money from debt – Selling
Most of the trade is based on Debt. This might sound a bit controversial because borrowing money to start a business is a horrible idea. And most people don’t want to do that. But there are businesses, especially traditional businesses, where using debt is your best option.
Let’s say you want to sell pens. It’s a very common product and there’s pretty much always a demand for it. Ideally, you would fly to China, find a factory that produces that kind of pen with good quality and the right price. You would purchase a container of pens, ship them to whatever country you want and distribute them to your clients.
But today, that’s mostly done through websites like Alibaba. Unless it’s a more complicated product where you have to fly to that factory. But You don’t really have to pay for the products to have the products first.
In the past 50 years, China has become the factory of the world producing literally everything. Thousands of factories work non-stop to produce everything that the world needs. And in order to make it easier to sell, most of these factories would gladly load you their products, in return that you would pay them some time in the future.
Of course, they would not lend to strangers. So, you’ll have to build some kind of trust with them first. But that’s how business has been running for the past 50 years. Once the client would sell the product in the US or any other part of the world, he would pay the factory and burrow more products.
You are basically telling the factory, you know how to produce it so let me help you sell it. If I can sell it for anything above this price, that’s going to be my profit. What makes this strategy great is that you’re not tying up your own money in this transaction. That’s why selling is one of the greatest skills you can ever master.
2. Make money from debt – Refinancing
Real state debt is the best kind of debt because it is filled with loopholes. If you don’t have a mortgage, then you are paying extra taxes. Rich people always have multiple mortgages to be able to get all of those deductions.
Remember every dollar that you are supposed to pay in taxes but instead, you save an extra dollar earned. So that’s another way rich people get richer. But let me give you a more practical way.
This is how basically rich people get rich in real estate. Let’s say you’ve saved $200,000. That’s a lot of money. But even with this money, you can’t even buy a house but you can get a mortgage up to $800,000 since you have to make a 20% down payment.
But, here is the secret. Let’s say that you’ve found a property that costs $500,000. It is in a bad condition and needs a lot of renovation. You head to a bank, and you can get a mortgage by making a 20% down payment.
Let’s say you are going to spend around 10% of the total cost of the house to renovate it or around $50,000. You head to your bank again but this time to refinance your mortgage. When you got your first mortgage, the value of that property was just $500,000 because it was in such a bad condition that no one wanted to live there. But since you have renovated it, now there are people who want to rent it out.
So the market value of that property, let’s say rises to $700K. The first time let’s say you are going to get an 80% mortgage but 80% out of $700K is around $560K. $400,000 out of that money is going to go to the first bank that gave you the first mortgage. And let’s deduct another $50,000 that you’ve spent on renovation and you are going to be left with an extra profit of $110,000.
You made $110K using debt. And you are left out with a property that you can rent out to build equity and generate passive income. On top of that, you’re going to avoid paying taxes because you have a mortgage. This is a very common practice among real estate investors. Can you really say after this that debt is bad?
3. Hedge funds
Hedge funds are made by the rich, for the rich, to make rich people richer. And they usually use unpopular strategies. People like me and you make our best efforts to predict which companies are going to grow and rise in value and invest the money we work so hard to earn in hopes for these companies to grow.
But hedge funds often use a completely opposite strategy. They try to make money when companies fall or go bankrupt as was with the case of GameStop. Although in that case, the internet challenged hedge funds and push them to lose over 13 billion dollars. But how do hedge funds make money with debt?
Let’s say you expect a certain stock to decline like Facebook because you know that Apple who produces the most popular smartphone will announce next week that they will no longer let apps to track you like Facebook or Instagram track your online activity and make privacy their first priority which will greatly damage facebook’s business model.
So you pick up your phone and call your broker to borrow from him a single Facebook stock. Let’s say that cost $100. And instantly sell it in the open market for a hundred dollars. congratulations, now you have $100 in your pocket. But you still owe your broker one Facebook stock.
Let’s you are right and facebook stock price drops to $70. You use that $100 to buy one Facebook stock for $70 since the price dropped. And return it to your broker and pocket the difference. Congrats, you’ve made $30 out of a full of stock.
It sounds simple in theory but it’s extremely difficult and risky in practice. What happens if you are wrong. What if the price doubles overnight. You still have to return a single Facebook stock to your broker. And pay interest for borrowing that stock. Now you have to buy that stock for $200 to return it to your broker.
When you buy a stock and try to sell it when it rises the maximum that you lose is the amount you invested in. but not in the case of shorting. If the price keeps rising, your losses keep rising. Theoretically, you can make unlimited losses since theoretically, the stock price can rise indefinitely.
But if you have a hundred analysts working for you, you can make a fortune using this strategy.
4. Forex
Forex is a market where currencies are traded. And it makes international trade possible. You can not use the US dollar in China. You have to use the Chinese Yen to pay for anything in China. There is a market where anyone or any company can come in and purchase foreign currencies. And based on different factors, these currencies fluctuate.
For example, the Fed raises interest rates that will limit the supply of dollars in the market and make us dollars stronger against other currencies or vise versa. So if you can predict which currencies will rise or fall you can make a lot of money in this market.
But what makes these markets so different from the rest is that for every dollar you use to trade in forex you can borrow an additional $100. That means if you trade using your $1000 you can hold a position worth $100,000. If you end up making a small profit like 1% it’ll be huge.
5. Credit Score
As you can see, debt is a powerful tool. Every successful business, company, or entrepreneur uses debt in various ways. Especially if you have a proven business model. Borrowing money to finance purchase orders is practiced pretty much by every business.
So, stop thinking in terms of all debt is bad. Of course, debt with a high-interest rate such as credit card debt is horrible. But in order to get a lower interest rate, you have to minimize the risk of loaning your money.
You can do this by building a track record of being a reliable borrower. There are billions if not trillions of dollars in the banks waiting for someone to borrow them. And even if there isn’t any money. Banks can create money out of thin air.
So this is how you can earn money from debts. What do you think about this article? Comment your ideas down in the comment section. If you find this information valuable share this article with others on social media.
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