Good Debt vs Bad Debt for Property Investors
Not all debt is equal. Understanding the difference between good and bad debt is the foundation of smart property investing.
Most people are taught that debt is bad, full stop. Property investors work off a different rule: there's debt that costs you money, and there's debt that builds wealth, and the two aren't hard to tell apart once you know what to look for.
What is good debt?
Borrowing to buy assets that grow in value or generate income. Investment property loans are the textbook case:
- The property appreciates over time
- Rent covers part or all of the loan repayments
- Interest on investment loans is tax-deductible
- Inflation quietly erodes the real value of what you owe
Example: a $500,000 investment loan at 6% costs $30,000 a year in interest. The property brings in $26,000 in rent, grows 5% ($25,000) in value, and the interest is fully deductible. You still owe half a million dollars, and your wealth is growing anyway.
What is bad debt?
Borrowing for things that lose value or produce nothing. Car loans, where the car depreciates the moment you drive it off the lot. Credit card debt, high interest against no asset at all. Personal loans for a holiday or a couch.
None of it is deductible, the thing you bought is worth less by the day, and every repayment comes straight out of your salary.
The crossover trap
Good debt turns into bad debt more easily than most investors expect. Drawing equity from an investment loan to cover personal expenses mixes the purpose of the loan. So does letting investment and personal borrowing sit in the same facility instead of two separate ones. A refinance that isn't structured carefully can muddy the deductible purpose entirely, and once that happens, untangling it at tax time gets expensive.
The takeaway
Keep investment debt and personal debt in separate lanes. Every dollar of good debt should trace back to an asset that's earning its keep. Your accountant will thank you for it come tax time.