Debt is bad, right? Well, unless you have a lot of capital locked away, property investment, from first apartments to investment properties, usually begins with debt. A mortgage is a good thing! It’s a step on the path to property ownership and long term returns on your investment. But, as a property investor, deciding on the optimal loan structure can be a difficult process. When considering loans for property investment, you can generate good debt or bad debt.
Good Debt
Good debt uses other people’s money (usually the banks) to buy an asset. An asset puts money in your pocket e.g. investing in property that puts money in your pocket via rent. This type of debt gives you a long term return beyond the product you purchase.
Bad Debt
Bad debt is borrowing money to buy something that loses value immediately and won’t earn you an income, for example borrowing money for a new car or motorbike. Things that depreciate quickly and significantly can generate bad debt, which you want to avoid.
Knowing the difference between these two debts is crucial and will help you choose the type of loan structure you want. The two basic choices are interest only and principal and interest.
Getting Use to It
Property investors need to get used to debt, especially because when buying an investment property, your first goal should be to find the property that meets your long-term goals, not pay down your debt quickly. Interest-only loans can be a great tool in this stage for giving you flexibility with cash and flexibility with property purchases, even if it may feel like your debt is just sitting there, not getting any smaller.
If you opt for a principle and interest loan and you unexpectedly need money, you have to apply to the bank to access that money – and there’s no guarantee they’ll say yes. But, once you’re happy with your property portfolio, an interest and principal repayment structure will help you reduce your debt and get closer to earning a substantial income from your investments.
The Best Debt
Ultimately, the best debt to acquire is a loan you can service while achieving your property goals, whether it’s building a property portfolio, consolidating that portfolio or generating income from your properties.
If you’re not sure what the best next step is for you in property investment, why not speak to our team of property experts today by contacting John Wills on 0467 443 838 or emailing john@willsproperty.com.au
