It’s only natural to be a bit afraid of debt. Most of us have been raised with the idea that financial debt should be avoided as much as possible. In my last blog I discussed the difference between good and bad debt. Now I’d like to look at how to take the fear out of debt and better manage debt to grow your assets.
I’m sure you’ve heard the old adage that you have to spend money to make money, and when it comes to investing this is most definitely true. It is however, vital that you’re clear from the outset on the reason behind taking on debt. Entering into debt, even when it’s good tax-deductible debt secured by an appreciating asset, needs to be an informed decision. When it comes to debt, with clarity comes comfort.
When making a decision on whether or not to take on debt, the most crucial factor to be considered is whether it’s within your means. Entering into some forms of debt can be beneficial to your wealth, but anything unsustainable will be detrimental to your financial pursuits. Debt needs to be used responsibly, so always remember to only enter into debt that’s going to be sustainable for you in the long term. Being irresponsible when it comes to debt can put you into a hole that can be very difficult to climb out from.
Once you’ve decided to move forward in accumulating debt for property investment purposes, the next step is to create a clear plan for the management and repayment of that loan. One of the most effective ways of managing your investment property debt is using an interest only loan facility. This will provide you with maximum flexibility as you will only be required to make the interest payment each month with the option of making additional payments, or building up offset funds should you choose. Having these options available allows you to set aside funds when they become available and if circumstances change in your financial situation you will have access to these funds to keep abreast of your debt repayments.
Entering into good debt will provide you with the opportunity to grow your assets and build a property portfolio that wouldn’t be possible without accessing finance. Historically, property has proven to be a great long term appreciating asset class and taking out a loan in order to invest in the property market is undoubtedly one of the most successful ways to take advantage of that opportunity.
Using my personal property portfolio as an example, there would be no way I could have built the portfolio of 39 properties I currently have without taking on certain debts and using them to my advantage. By doing the research on the options and opportunities available to me, I was able to channel the limited financial resources I had when I started out in 2000, to start building investments that now generate enough income to cover all of the expenses associated with those properties. I was able to do this without creating a situation that was financially draining, and much of this is attributed to the successful management of the loans I had taken on.
Debt is certainly a very useful tool for the savvy property investor when used effectively. Each time you are considering adding to your current debt levels, be sure to consider how you will manage and sustain that debt, as well as how it will help you meet and achieve your future investment goals.
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Back in 2000, Garry Harvey was a 26-year-old Victorian looking to buy his first home. Now, still shy of his 40th birthday, YIP’s runner-up for Investor of the Year 2012 has amassed a diverse portfolio of 39 properties that return more than $500,000 a year in rental income and have given him $2.75million in equity to work with. Garry is a fan of buying in bulk, and he has made the most of a strategy centred on subdividing blocks of units.
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