Oliver Baumeister von Bretten, Broker | Sotheby’s International Realty Canada, Brokerage

Facts About Debt That Every Investor Needs To Understand

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A lot of Canadians believe that they should pay down the mortgage as fast as they can. Even though it is a widespread idea, it is an entirely wrong thing to do when you want to invest in real estate. Instead, you should go for increasing the debt in your home to invest in more cash-flow producing property. Do you want to know why? Read on!

Various factors go into consideration about debt for every investor. Here are a few. Moreover, you will learn about good and bad debt and also whether you should pay off your debt or not. Find out everything that an investor should know about debt.


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Facts about debt that you should know before making an investment

#1 Debt should be used smartly
Most of us have the wrong idea about debt. Yes, there is bad debt as well that includes credit card debt and various other debts that you have taken. That is certainly some amount that you are never getting back. However, there is good debt as well.
If there is debt tied to a cash flow such as real estate, it can be a positive asset. This debt can make you wealthy. However, keep it in mind that financial freedom and debt aren’t mutually exclusive. So, till the time you use your debt smartly, you will be on the right track, and real estate investments will make you wealthier.


#2 The rich take advantage of debt
Have you ever thought about what the rich do to get richer? They take out a mortgage to get wealthier. These people generally find investors who will provide them with money so that they can do something to make more money using it. The main idea behind this is that you borrow money at a very low-interest rate and invest it into something that is appreciating at a much faster rate. By doing this, you will have more money than you would have invested. This is how wealthy people take advantage of it.


#3 Debt is a more powerful tool
It is great if you have already paid your mortgage. However, you will not get any benefits from that equity. It doesn’t matter whether it is a $1.3 million detached home or a $500,000 condo in downtown. Equity will be just locked up in your property if you don’t utilize it properly. You should tap into that equity by opting to refinance it. This way, your equity will be working again.
This doesn’t mean that you don’t have any equity in your house. There are various risks attached to that too. However, instead of having a lot, you can find a middle ground and invest.


#4 Debt is cheap
Due to the rate hikes, you might forget this; interest rates are historically low. Not a long time ago, 12 percent was a reasonable interest rate. However, it was in the mid-’80s that interest rates were north of 20 percent, and it was quite common. This is a great comparison, which also shows how high these interest rates could go in the near future. Therefore, now is one of the best times to invest instead of paying off the debt.

These were a few facts that you should keep in mind about debt. These points can really help an investor in making the right decision when it comes to real estate investment. Now, let’s find out what is good debt and bad debt and whether you should pay it off or not.


What is good debt and bad debt?
If it came to taking out consumer debt or never using debt in any quantity, you should certainly go with no debt. However, there is good debt as well, and due to this, real estate investment is powerful. So what is good debt? It allows you to leverage an asset that produces income. Basically, you increase your future wealth instead of taking out debt against it. One of those assets can be real estate. It is mainly money from other people that can help you get exponential returns with real estate.

In case there is no debt, then holding up real estate will pretty much give you the cash flow and also the tax benefits. Even though that is not bad, it could get much better if there were some good debt as well.

Though you will lose some cash due to mortgage but that cash flow will still remain. It will be on smaller cash investment, but you should only purchase properties that will give money even with debt on them. Therefore, the return will be a lot higher.


So should you pay it off?
There is no clear answer to how you should invest if you have debt. However, one thing is certain. You should free up as much bad debt as possible. If you have a credit card or car debt, you should clear it off at the earliest. You should be in control of the money that you have and spend efficiently before spending more.

Being in debt certainly does not mean that your real estate investment dream will be on hold. Instead, you should need to evaluate your expenses and income and adjust them in the best way possible. Therefore, when you invest in real estate, there are chances that you will be in debt, but till the time the property is making money, you shouldn’t worry about anything.
Many people purchase properties for cash without really knowing much about the area. This certainly makes a terrible investment that will not be beneficial for you. However, if you use good debt as a wise tool, you can take plenty of advantages from real estate investing.

Not all the debts are created equal. Therefore, you must distinguish between the good and the bad debt. It will help you to be in a smart financial situation where you can take advantage of real estate investment.


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