Good Debt vs Bad Debt

Put your money to work, and you will reap the benefits. Some of us are a bit wary of the idea of being in debt – but not all debt is bad. Let’s compare the difference:

Good debt is an asset which increases in value over time, and bad debt is an asset that declines over time.

The type of debt that is most familiar to us is debt where you have to pay back money with interest for purchases that you’ve made. This is classified as ‘bad debt’ because it’s a non-income producing asset or loan. Bad debt also happens when you borrow to invest and the asset depreciates in value. This means the interest on the loan is non-deductible. Examples of bad debt include things like credit cards and car loans. 

Good debt is when you borrow to invest and your investment produces you an income. You also get good debt where your investment increases in value after you invest, like when you invest in property or shares, for example.

Oftentimes, you cannot avoid some form of bad debt, but the key is to minimise it. Let’s have a look at some of the ways you can get yourself into a good debt position.

1.  Minimise your tax and maximise your debt

If you can, try and put yourself into a position where you can pay down your credit card and any loans that you have. You could try to roll any loan together and take advantage of interest-free periods or other benefits offered by banks that will make paying your loan easier. If you have an expensive car loan, consider selling your car and downgrading until you have your debt situation under control. If you are an investor already you should be taking advantage of the tax breaks available to property investors in Australia.

Also, try and put yourself into the best possible situation for getting a loan from a bank. If you’re a contractor or work freelance, consider taking on full time work or permanent part time work while you work at getting loans for property investment. If you make yourself a favourable candidate banks will be more likely to approve you for finance.

2. Get it under control

A savvy investor will always try to make sure that they have as much of the stuff that they can control under their control. Certainly, there are things that are always beyond your reach, like supply and demand, rental demand, economic growth, population growth, interest rates and policy changes, but the smart investor will make sure that they have some control over these factors by managing others.

For example, while you can’t control rental demand, you can control what kind of property you’re going to buy in a certain area. So if you have done your research and know the demographics and what’s in demand, you’ll know what kind of property is going to be most likely to rent. The same goes with supply and demand; if you have had a look at the property in the area and done your research you’ll be more likely to choose an area primed for growth.

You’re more likely to have an income-producing asset (i.e. good debt) if you choose your asset based on research and knowledge. You can also wrangle greater control over the uncontrollable by adding to your existing property or portfolio with things like a renovation to add value, a subdivision or a development like a granny flat. These things all potentially work to increase the value of your existing property.

3.  Know your stuff

A good investor will know the ins and outs of their portfolio and understand their potential to invest. They’ll also have a plan in place for the life of their investments and know which kind of property they need to buy and where they need to buy it in order to be successful. Some of the key questions that you should ask yourself before and while you invest are:

1.       What is your protection strategy?

2.       What is your debt reduction strategy?

3.       What is your property strategy?

4.       What is your finance strategy?

5.       What is your tax minimisation strategy?

If you don’t know the answers to all (or at least 4 out of 5) of these, then you might be in need of some property investment advice!

You need a great strategy to get ahead in property investment, because investing without a strategy and plan can lead to poor decision making, poor investment choices and ultimately, bad debt. As Sun Tzu said “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” As buyer’s advocates and property investment coaches we equip every one of our clients with a property investment strategy that will see them through the life of their investments.

This is all tip of the iceberg type stuff though, and we’re always looking ways to help our clients with investing smarter and building a portfolio. If you’re ready to get ahead with property investment, you should consider coming along to a complimentary consultation with one of our expert coaches today. 


Jason Paetow is the Managing Director of AllianceCorp, a buyer's advocacy and property investment company. Jason has over 15 years of experience in the property industry and is an expert at property investment strategy, and in coaching and working with clients to optimise their success through education and support. He is a qualified Financial Planner, Mortgage Broker, REIV Licensed Real Estate Agent and a Licensed Builder. To find out more, please visit www.alliancecorp.com.au.


Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.