Good Debt and Bad Debt Explained | Basic of Property Investment | Investment Property in Australia

November 30th, 2023

Property investors often worry about taking on too much debt. However, it’s important to understand the difference between “good debt” that builds wealth versus “bad debt” that solely costs you money over time. Empire 8 Property specializes in guiding investors to use smart leverage strategies to grow their real estate portfolios.

The Core Difference

The crucial differentiation lies in determining whether the debt contributes to your income or remains merely a financial obligation. It’s essential to assess if the borrowed funds have the potential to generate returns for you. Making wise decisions regarding debt is paramount for financial success.

Bad Debt Drags You Down

Owing money through credit card balances, car loans, or home mortgages doesn’t directly contribute to your income. Although these debts may offer some practical benefits, from an investment perspective, they only incur expenses. Accumulating substantial non-productive debt for luxury items or lifestyle upgrades, instead of investing in assets, can burden your financial situation.

Good Debt Lets Investments Pay for Themselves

On the other hand, investment debt taken on strategically allows you to acquire assets that cover their own costs. For example, financing an investment property lets rental income pay off the mortgage principal and interest. Similarly, borrowing to start a profitable business can fund growth that increases the value of your holdings.

A Tenant-Backed Asset

In real estate, using other people’s money in the form of a mortgage to buy property that renters pay for each month represents good debt. You hold the asset that goes up in value over time while the tenant pays back the loan you took out.

If you’re hesitant about embracing beneficial investment debt, Empire 8 Property provides a complimentary 30-minute consultation to explore your objectives and risk threshold, aiming to construct the best-suited portfolio for you. Contact us for additional details!