3 Ways To Avoid Getting Into Bad Debt When Buying A Property
We’ve all heard the Good Debt vs Bad Debt story, but if you haven’t let me explain it in simple terms.
Good Debt = getting into debt for things that will INCREASE in value. Things like property investments and shares.
Bad Debt = debt that is attached to things that will FALL in value. Cars are the first that come to mind. Credit card consumer debt is another biggie.
FOR A LONG TIME NOW, PROPERTY HAS HAD AN INTIMATE ASSOCIATION WITH GOOD DEBT, BUT IN SOME CASES, I BEG TO DIFFER.
If you’re buying property that is under-performing, doesn’t serve a purpose in terms of your Master Plan and life goals or is costing you an arm and a leg financially to the point where it’s affecting your day to day lifestyle, then I think it’s safe to say this isn’t exactly what one would consider Good debt?!
I get that investing in property is one of the best ways to build wealth over the long term, and that 99.9% of us need to borrow and leverage to make this happen (hence get into debt), but it never seems to amaze me the number of so called “investors” I speak to who are in financial pain from their property investments.
IS THIS REALLY A GOOD THING?
YOU SEE, THE CONVERSATIONS LOOK LIKE THIS.
“Wendy, this property is costing me a fortune to hold and I’m starting to wonder whether I should sell it?”
“I haven’t seen any growth in 5 years and the tenants keep giving me headaches with constant maintenance requests. Have I bought a dud?"
Back in the days when I started investing in property (AKA the 2000 era), I was buying property for less than $200,000 which meant the whole borrowing scenario was a lot LESS.
Less deposit upfront, less in stamp duty, less in fees and less in lender’s mortgage insurance (LMI).
ULTIMATELY, THE COST TO GET INTO THE PROPERTY MARKET WAS A LOT LESS THAN IT IS NOW.
So with that said, investors need to be incredibly savvy and strategic if they’re to get it right and build a high performance portfolio.
There’s a lot more money at stake these days and the entry and exit fees alone are enough to put a lot of people off investing altogether.
BUT WITH THAT SAID, IT SHOULDN’T SCARE YOU OFF COMPLETELY.
The key in my opinion is Research, Education and smart, Trusted Advisors.
A powerful combination of these 3 will set you well on your way to getting it right in property.
SO LET’S BREAK THESE DOWN SO THAT YOUR GOOD DEBT IN PROPERTY DOESN’T TURN INTO BAD DEBT.
RESEARCH - DO YOUR HOMEWORK PEOPLE!
Don’t just jump into an investment because that “expert” at the property investment seminar told you to. Research the areas and also the people who are advising you. Do they have your best interests at heart or are they just “selling” you into a property because they’re getting paid to do so.
EDUCATION - LEARN EVERYTHING YOU CAN.
Smart investors know that to continue to be on top of their game, they should never stop learning.
This goes for people in general, but when it comes to property, the investors who really do well out of property immerse themselves in learning everything they can about it BEFORE they make decisions about what and where to buy.
They seek to understand how capital growth works and what drives property markets so they can make strategic decisions, rather than hope and prey their ego has listened to the right people!
These investors study negotiation and work out how the real estate industry works so that they put themselves in the strongest position possible to secure a great deal.
ULTIMATELY, EDUCATING YOURSELF IN PROPERTY AVOIDS MAKING THE STUFF UPS THAT MANY FIRST TIME INVESTORS MAKE.
HECK, I EVEN WROTE A BOOK ABOUT IT!
BUILD YOUR PROPERTY A-TEAM.
Thirdly, your trusted advisors become your A-Team in property.
These people should be well-researched before they jump on board your bus and rightly so; there’s a lot of phoneys out there in the property industry!
People claiming to know the secrets, the get rich quick advocates who prey on novice investors chasing their first million in property. You want to steer clear of these types because they’ll turn your Good Debt for property around in an instant.
I’VE SEEN IT HAPPEN NUMEROUS TIMES I’M AFRAID.
Arm yourself with these 3 and you’ll stand a much better chance of building that investment property portfolio that does what it should - create financial security in the long term and build wealth.