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. But property investors know there's a critical difference between debt that costs you money and debt that builds wealth.
What is good debt?
Good debt is borrowing to buy assets that grow in value or generate income. Investment property loans are the textbook example:
- The property appreciates over time
- Rent covers a portion (or all) of the loan repayments
- Interest on investment loans is tax-deductible
- Inflation erodes the real value of the debt
Example: A $500,000 investment loan at 6% costs $30,000/year in interest. But the property generates $26,000 in rent, grows 5% ($25,000) in value, and the interest is fully tax-deductible. Your wealth grows despite owing half a million dollars.
What is bad debt?
Bad debt is borrowing for things that lose value or generate no income:
- Car loans (the car depreciates the moment you drive it out)
- Credit card debt (high interest, no asset)
- Personal loans for holidays or consumer goods
The interest isn't tax-deductible, the asset loses value, and the repayments come entirely from your salary.
The crossover trap
Many investors accidentally turn good debt into bad debt by:
- Drawing equity from an investment loan to pay personal expenses (mixing loan purposes)
- Not maintaining proper loan structure (separate investment and personal loans)
- Refinancing in ways that muddy the tax-deductible purpose
The takeaway
Keep your investment debt separate from personal debt. Every dollar of good debt should be clearly traceable to an income-producing asset. Your accountant will thank you at tax time — and so will your portfolio's growth.