Property Investment

8 min read

Good debt vs bad debt – can debt be good?

As a property investor, not only can debt be good, but it can also help you grow your wealth faster. Here you’ll learn the differences between good and bad debt.


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A lot of Kiwis think all debt is bad.

Why wouldn’t you? It’s been drilled into many of us from childhood. This often comes from:

  • our family members
  • our religion, or
  • public figures.

For instance, Dave Ramsey – a famous American financial coach – says: “There's no such thing as good debt. The shortest distance between you and wealth is having no debt”.

But I want to challenge that. Because as a property investor, not only can debt be good, it can also help you grow your wealth faster.

So, in this article, you’ll learn the differences between good and bad debt.

What is good debt?

Good debt is where you borrow money to grow your wealth or income faster.

Of course, we’re going to get into property investment. But let’s start with something familiar to many Kiwis – student loans.

70% of university students borrow from the government and take out a student loan, according to Victoria University.

These students are using debt to get an education; an education many couldn’t afford without debt. They then use that education to earn a higher wage than those who don’t attend university.

10 years after graduating, university graduates earn 67% more than those who didn’t attend university. They then use these higher incomes to pay back the debt.

That doesn’t mean that everyone should go to university, but it does show that taking out debt can allow people to invest in their future.

Now let’s apply this to property. Good debt can allow you to purchase an asset that makes you more money.

For instance, let’s say you buy a property tomorrow for $600k and borrow all the money from the bank.

If that property increases in value to $700k, you’ve used debt to make $100k worth of equity.

In effect, you’ve used debt to improve your financial position.

Yup, there are risks and considerations around cash flow. Your property does need to achieve a decent yield, and even still the rent will likely not cover all the property’s costs.

However, there is money to be made in property. For many Kiwis, you cannot build wealth through property unless you use debt.

And that’s because you likely don’t have $600,000 in the bank to spend on real estate.

Other examples of good debt include:

  • Borrowing money to buy a business that you can then grow or earn an income from
  • A business borrowing money to purchase machinery so it can produce more or decrease costs
  • A person borrowing money to get other education (outside university)

In all these examples, the debt is used to put the borrower in a better financial situation than before they took out the debt.

What is bad debt?

Bad debt is when you borrow money to spend on yourself. Here the focus is on buying something you want to improve your lifestyle now rather than investing for your future.

Here at Opes Partners we consider debt bad when you don’t use it to buy or build an asset.

Some examples of bad debt are:

  • Credit card debt
  • Afterpay
  • Hire purchases
  • Car finance
  • Personal mortgage (if you buy a house that’s nicer/bigger than you need)

Let’s go through an example of bad debt to understand why it can put you in a worse financial position.

Bad debt example – hire purchases and afterpay

Hire purchases, and Afterpay (even at 0% interest) are bad debts. There are two main reasons:

You spend more money

The first reason is that you end up spending more than you should.

When Afterpay markets itself to businesses, one of the key selling points is that we (the business’s prospective customers) spend 18% more than we otherwise would.


This means Kiwis often spend more money than they intended.

And this happens because you get the benefits immediately when you use debt.

In other words, you might leave the clothes store with the items you want but you haven’t felt the full costs yet because you only had to physically pay for a portion of it upfront (in the case of Afterpay).

Spending more money than you intended leaves less money for investment spending.

Bad debt stops you from taking out good debt

Even if you take out an interest-free hire purchase, it can still stop you from borrowing money for investing.

That’s because, when you apply for a mortgage, say for an investment property, the banks run a series of tests over your mortgage application.

For example, let’s say you’ve taken out a $10,000 hire purchase to buy a lounge suite for your house. You’re paying it off at $100 a week, and it’s 0% interest, so this will all be paid off over the next 2 years.

That single $100-a-week payment could stop you from borrowing up to $62k for an investment property. Ouch.

This could be the difference between getting the money for an investment property or not.

Now, let’s take a look at another example of bad debt.

“But I use my car to get to work … is that bad debt?”

While I said above that car debt is bad … you can sometimes make an argument either way.

Some investors will ask: “I need a car to get to work, but I don't have the money to pay for it – is that bad debt?”

Well, no. Not necessarily. If you use the car to earn an income (and you don’t already have a car), there is an argument to say that this is good debt.

Alternatively, some business owners will put their cars on finance. That’s because there are tax benefits, and they can use their cash more productively elsewhere.

So I’m not saying there aren’t exceptions.

However, people often use these exceptions to the rules to kid themselves into taking more debt.

For instance, buying a second-hand car on finance for $10k could be considered good debt if you don't have a car (and need it to get to work).

But trading in your car to get a nicer one … and taking on $40k of finance in the process? That is undoubtedly bad debt.

So I can feel OK about getting into debt?

Some newbie property investors are nervous about getting into debt and want to pay it off as fast as possible.

In some instances debt is undoubtedly bad. It can cause you to spend more than you need, putting you in a worse financial position.

But some types of debt (if managed) can help grow your wealth and improve your finances.

Opes Partners
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Andrew Nicol

Managing Director, 20+ Years' Experience Investing In Property, Author & Host

Andrew Nicol, Managing Director at Opes Partners, is a seasoned financial adviser and property investment expert with 20+ years of experience. With 40 investment properties, he hosts the Property Academy Podcast, co-authored 'Wealth Plan' with Ed Mcknight, and has helped 1,894 Kiwis achieve financial security through property investment.

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