Good debt vs bad debt for property investors
Which debt builds wealth and which just costs you, and how good investment debt turns bad when personal and investment borrowing mix.
Most people are taught that debt is bad. Property investors split it in two: debt that costs you money, and debt that builds wealth.
What is good debt?
Borrowing to buy assets that grow in value or generate income, like an investment property loan:
- 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: a car that depreciates the moment you drive it off the lot, credit card debt (high interest, no asset), a personal loan 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 can turn bad. 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.
Keep the two apart
Keep investment debt and personal debt in separate facilities, so every dollar of investment debt traces back to an asset that earns income. It also makes the deductible purpose easy to show at tax time. To see how much a rate rise would add to your repayments, use our rate rise calculator.