Good vs Bad Debt

The Scene: Amber is in the initial stages of understanding the Cash Machine. Dylan advises her to buy a used car rather than lease a new one. Then the following discussion starts.


“You need to weigh the pleasure of driving a new car against the other rewards you could get for your $10,000.”

“Like what?” I asked.

“Remember that quadruplex I bought after living with my parents for that first year? I put less than $10,000 down on that property.”

“You must have been left with a gigantic mortgage.”

“True, but not all debt is made equal. My mortgage is high-quality debt.”

“High-quality debt?” I laughed. “Isn’t that just some rationalization, like high-quality herpes?”

“Don’t thumb your nose at debt. Debt can be good or bad.”

“How can debt be good?”

“Good debt is leverage. In this case, my mortgage allowed me to buy a property 30 times what I could afford to buy in cash.”

“But isn’t that going to be a weight around your neck? How’s it any different from a car lease?”

“The difference is that I didn’t just acquire debt; I also acquired a passive income source. I moved into the basement and rented out the other three apartments.”

“I think I see what you’re saying. It’s not that mortgages are good debt and car leases are bad, it’s more how you use them, right? Like my cousin George got a decent paying job as a driver, but he needed a certain kind of car for it. So for him, his car lease was good debt because it allowed him to make a lot more money.”

“Exactly. From the time I moved into my first quadruplex, the money I collected each month covered my mortgage payments plus taxes, insurance, and utilities. It also brought my housing costs down to zero. I made a profit really—most months, I had money left over.”

“How long was your mortgage?”

“30 years.”

“You must have been about 20-years-old when you bought that house.” My eyes grew wide as hubcaps. “Are you saying that by the time you hit 50, you could own a four-unit building outright, without ever putting in more money than I’ve spent on my piece-of-crap car?”

“I thought you liked that car?”

“I did. But if you had three rental units and no mortgage, you could retire on that.”

“Are you starting to see the power of the Cash Machine?” Dylan reached for another biscotti, but I snatched the jar, sealed it, and put it atop the refrigerator.

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