Most of us think debt is a bad thing. Debt drags you down. The rich never owe debts.
Although this may have been true for our great-grandparents, it's no longer the case. Debt is one of the keys to unlock your future wealth as a real estate investor. The more good debt you have, the more income you can generate.
But before we go out and invest a lazy $1 million, let's talk about the right kind of debt. The debt that will lead to success, not destruction. Is called…
Through real estate, you can use your assets to accumulate wealth. Simply put, you can withdraw funds from one property to buy another property. Similarly, borrow money from a bank or other financial lending institution and use that cash to buy real estate. Over time, this will bring you income and capital appreciation. This is a wise way to use debt to accumulate wealth.
Record interest rates are ready to take advantage of, and now is a good time to borrow money. Cash is cheap, which means more people can borrow and invest more easily. The opportunity to create wealth as an investor is very good. However, even if interest rates are low, banks are not just throwing away cash. You need to take some steps to ensure that you can borrow the maximum amount and then use the money to start building a portfolio.
Step 1 - Tidy up your finances
For at least three months before you want to borrow money make sure you get your finances in shape. This means:
- get rid of direct debits (an ongoing drain on your finances, and;
- reduce unnecessary expenditures.
Your borrowing capacity and the amount of borrowing will depend on the cleanliness of your account and budget. Think of a strategy to reduce your expenses and keep your bills looking healthy.
Step 2 - Leverage your loan
The point of borrowing for property investments is not to reduce your loan amount as quickly as possible. The notion of debt being bad is hurting you. Debt is actually your best friend.
Think about it. You have $100,000. Do you spend all your money on one deposit, or do you divide the cash into two deposits and buy two properties?
Can you use your debt to work harder for yourself and start generating cash flow faster?
If you can divide your deposits into smaller amounts and buy more properties, your debt will start to generate cash flow faster.
Step 3 - Get the right loan for your strategy
When we try to make debt work for us, the difference between interest-only loans and principal and interest-only loans is important.
The key here is to read the terms, especially when it comes to interest-only loans. Although they may be the smartest way to get the most out of your deposit, you need to understand how your finances will need to adjust at the end of the interest-only term.
Part of getting comfortable with debt is understanding it and knowing the attached terms and conditions. Smart investors know their interest costs and how this could affect their debt moving forward. In short, read the fine print and pay attention. It will make a difference.
By now, you may have realised that good debt can be your loyal friend to create real lasting wealth.
However, the real key is to ensure that you maximise your borrowing potential through a reliable real estate investment plan and prepare for your long-term financial success. For this, you are best to consult both an investment savvy mortgage broker and an independent property advisory service, like we offer here at Lush Property. You can book a free 30min consultation by clicking here
Luke Jorgensen - Lush Property
Tags - Property Investment; Property Development; Renovation; Valuation; Valuer; First Home Buyer; Buyers Agent; Buyers Advocacy