How debt can actually help you build your wealth
When we think of debt, the majority of us immediately assumes that debt is bad and needs to be paid off. However, it’s important to remember that not all debt is bad and debt can actually help you build your wealth and thereby build your property portfolio.
Instead of just buying one or maybe two properties, which let’s face it, won’t give you the most comfortable of retirements, you should use debt in your favour. There’s realistically no way that we can save enough money to retire on, as for a passive income of $50,000 in today’s money, you will need approximately $1 million in cash in the bank, super or in income producing assets such as property.
Debt, if used correctly can allow us to buy multiple properties and lead us to a comfortable retirement, or even take an early retirement if you prefer. It’s important though to do your numbers and always borrow comfortably within your budget. If interest rates were to rise then you will still have the capacity to pay down this debt, without getting yourself into financial difficulty. A Mortgage Broker can assist you with this.
Bad Debt vs Good Debt
Firstly, it is important to understand the difference between bad debt and good debt. Bad debt is associated with items that depreciate in value and don’t produce an income. These items also tend to carry a high interest rate. Examples of bad debt include cars, holiday loans and credit cards. Cars for instance depreciate in value quickly and cannot be deducted in tax, whilst credit card debt can quickly get out of hand if you cannot meet the full monthly repayments.
If you have bad debt, then this can also affect your borrowing capacity when you do try to apply for a home loan, making it harder to be approved for a loan, so it’s essential that you pay down any bad debt that you might have as quickly as possible.
Good debt on the other hand is used to fund an investment that will generate long-term gains such as property. Good debt can produce an income or capital growth and also allows for tax deductions. It also tends to carry a lower interest rate compared to credit cards for instance.
How can you use good debt to build wealth?
So, how can you use good debt to build up your wealth and own multiple investment properties to get you closer to a comfortable retirement? The first thing you need to do, unless you already have one is to buy a property to get yourself onto the property ladder. This can be achieved through a 10 per cent deposit if you buy a property off the plan.
Once you have a property, then you can use a tactic called leveraging to get you to property number two sooner. Leveraging is simply an act where you borrow other people’s money to own a larger asset such as property in the hope that the profits are greater than the interest.
When you own a property, you might have paid a 10 per cent deposit and the bank loans you the other 90% of the property value. For example, you buy a property costing $500,000 and you pay $50,000 whilst the bank pays $450,000. If your property increases in value to $600,000, you have made a $100,000 gain.
As your property is growing in value, you can use the equity from this property to buy your next property investment, rather than having to save up another deposit from scratch. As long as you can afford to service the debt, then leveraging can help you build wealth much faster than if it was just sat in the bank.
Once you purchase investment property two, then you can follow the same steps as above and use the equity from this property to purchase investment property number three and so on.
How to build wealth faster through property?
By following the above steps, you will begin to accumulate properties over a few years. However, there are a number of ways that you can also speed up the process of building wealth through property, especially if you are short on time. These include the following factors.
1. Buy property in a high growth suburb
If you buy a property in a high growth suburb, then you may experience higher amounts of capital growth in a shorter space of time. Look for suburbs that are regenerating, or near suburbs that have just regenerated and home to a new shopping centre for example, which will attract new residents and provide greater employment opportunities.
2. Buy close to conveniences
As you will want to attract rental tenants, it’s in your best interests to invest in a property that is close to public transport, shops, restaurants, schools and parks. This will make your property far more appealing to rental tenants and easier to rent out, ensuring that you don’t have to fork out money to pay the rent yourself.
3. Buy off the plan
When you buy property off the plan then you can make the most of longer settlement times. Depending on when you buy and the type of development you buy in, your property might not settle for another two years or more. This gives your property two years to grow in value, without you having to start paying a mortgage. This is particularly good if you combine this with buying property in a high growth suburb.
4. Start early
The earlier you start buying property, the more time you have for your assets to grow in value and the more time you have to build your property portfolio. Ideally, you want to start buying property in your 20s or 30s. If you’re in your 40s and have yet to purchase property, then you don’t have as many working years to save and service a loan. Also, the later you leave it, the harder it is to get approved for a loan from a lender.
5. Try to buy an investment property every few years
By following the above, you should be in a position to buy an investment property every few years, allowing you to reach a comfortable retirement far sooner. However, there might come a point in time where you need to sell off one property, to pay down the debts of the others. Owning at least one property in full is always good to have for security if you don’t like the thought of having too much debt on your shoulders. However, as long as you buy sensible properties in good locations, with high demand from renters, then you’re likely to do well.
6. Speak to the experts
If you’re unsure of the best approach for you and which suburbs you should be buying property in to help you build wealth, then fortunately our Property Consultants can help. Our Property Consultants at iBuyNew can create a plan to help you meet your property investment goals sooner and show you how you can utilise good debt properly. Our in-house Mortgage Broker is also available to talk to if you’re not sure how much you can borrow from the banks.
Key things to keep in mind
Like everything in life, it’s important to do your research and know what it is you are getting yourself into. By understanding the property process, you will have a clearer view of what is happening instead of relying on other people to tell you what to do. You should also do your research on the property and the suburb to make sure you are buying a property that is likely to perform well. Other factors to keep in mind include the following.
1. Your borrowing capacity
Remember to always buy a property that sits comfortably within your borrowing capacity. This is because you don’t want to stretch your finances too far if something was to happen and you could not meet the monthly mortgage repayments, such as being made redundant, or lenders changing their lending requirements. A Mortgage Broker can assist.
2. Interest rates rise
Keep in mind that while interest rates might be low today, by the time your property completes, interest rates might have increased. If you take on a mortgage today, then to provide yourself with some certainty, you might want to have a mortgage that is fixed, rather than variable to lock in a great rate today and not have to worry about interest rate rises for a few years.
When you start to accumulate more properties, it’s particularly important that you diversify. Try to buy in different suburbs or states, at different price points and different property types. This will help protect you if one property market was to fail, or experience flat growth, as not all of your property investments will suffer. As the old saying goes, “Don’t put all your eggs in one basket.”
Get in Touch
Want to learn more about how you can use debt to build wealth faster? Get in touch with the iBuyNew team today to learn more about leveraging and which of our properties will help you to achieve wealth faster.
Call us today on 1300 123 463 to find out more.