Good Debt vs. Bad Debt
Most of us have been told at some point in our lives that debt is bad. For the most part, debt that is used to fund non-appreciating assets is bad. Things like car loans, or personal loans for holidays are not going to help get you ahead financially.
However, when debt is used on assets that grow in value, it can be incredibly powerful.
Whenever I look to expand my current property portfolio, I will always look to use equity and not cash. The reason I do this is because when I purchase a property using equity, the debt that I am going to be taking on will be tax deductible debt.
Tax-deductible debt used for assets that increase in value over time is one of the most powerful ways of building wealth.
This is how I’ve been able to build my property portfolio. I started by buying one asset and then over time as the equity in that property increased, I was able to pull it out and use it to fund another property. From there the process continued to snowball.
All the while, I was able to claim the interest on the investment debt as a tax deduction and the underlying assets that I purchased increased in value.
The right type of debt gives you an incredible amount of leverage. If you think about it, I only ever really needed to come up with the money for my first deposit and from there, I have been able to rely on equity to grow.
That’s not to say I haven’t put in more of my own cash over time into different projects and also repayments, but the growth in equity has far exceeded the amount of cash I’ve ever had to put in.
Home Loans
There is one area where using cash is going to be worthwhile for investors. If you already have a home loan, then you might be able to look to consolidate some of your other debts and reduce your ongoing costs.
Home loan interest rates are typically some of the lowest rates you will pay. In contrast, things like unsecured personal loans can be very high with credit card debt usually at the top of the list.
If you have a home loan, it can be worth paying down some of these non-deductible debts and using the lower interest rates on offer as part of your home loan.
This is how you focus on getting your money into the right areas. This way you will reduce your overall repayments and you will pay down your non-deductible debts faster. Then going forward, you should look to keep these types of debts to a minimum or cut them out completely.
Then just focus on putting your money and your equity to work in areas that will increase in value the most. Like high-quality blue-chip real estate.
This is how you build wealth over time and use debt in the right way.
If you are interested in wealth-building through strategic investments in appreciating assets, feel free to reach out to a Henderson buyer’s agent today for more information.
