Using Debt To Your Advantage
The first step to becoming a successful property investor is to realise that debt can be a good thing.
In the world of finance, you have two types of debt, bad debts and good debts. Let’s look at both.
Good Debts
Good debt can be described as debt that helps you build equity or increase your net worth. An excellent example of good debt is your residential investment property loan. With residential investment property loans, your debt is being used to purchase an asset that is likely to only increase in value, thus providing you with capital growth and greater net-worth.
Bad Debts
On the other hand, bad debts are the ones that negatively impact your financial future. Bad debt might be described as obligations that last longer than the purchase item and ones that have no return toward increasing your net worth.
Bad debts are those debts that are caused by things such as gambling, using a credit card, and buying depreciating assets such as computers or cars. Credit card debt is the most common of bad debts with an estimated 60 percent of card holders unable to pay off the balance of their card each month. You should eliminate nonproductive, expensive debts as soon as possible.
Investment Property Loans – The Good Debt
Fear of debt is one of the first big barriers a-would-be property investor must climb. Generally when it comes to property investment you have three options for how you will finance the purchase.
- The first option is to spend $250,000 buying an asset. The home eventually doubles its value to $500, 000. Great, you’ve just made a 100% return on your investment.
- The second option is to spend $50,000 and borrow $200,000, for the same asset that doubles in value to $500,000. You have now just made $250,000 from using someone else’s money!
- The third option is to have the full amount financed by using your asset as equity, and using none of your personal savings
To be an effective investor you must understand what banks want and like. Banks seek security when borrowing and bricks and mortar investments are viewed positively by most financial institutions.
The reason why banks like residential investment property loans is because compared to other types of investments, investment properties offer the strongest potential for proven capital gain. This means, you can borrow often borrow more for a residential investment property loan than you can for other types of investment opportunities such as shares.
By leveraging your buying power through residential investment property loans, you also opening the door to other possible benefits, particularly tax deductions on the loan interest, depreciation, and set-up costs. These tax deductions mean money back in your bank account!
To find out more on how to make your residential investment property loan become a good debt and work harder for you through tax deductions and income generation, give the team at greatinvestmentproperties.com.au a call.
For further information, please Contact us today.
