Last week, we discussed different types of bad debt and it's consequences. On the contrary, good debt makes you money in the form of tax deductions or cash flow or equity or a combination of these benefits. Good debt most often is borrowed at a low interest rate that allows you to grow your wealth while it provides ‘passive income’ (income you don’t have to work for).
- A mortgage on a rental home or apartment is considered good debt, if the money coming in from rent each month exceeds the expenses. This is called positive cash flow or passive income. The mortgage interest is also tax deductible as are the expenses of running and maintaining the property.
- An investment loan can be good debt as well. Investment loans (aside from RRSP loans) are tax deductible, up to 100%. If your investment loan is invested in income producing assets, then you are able to use the income earned to pay off the debt and have cash flow
Bad debt refers to consumption, such as spending on furniture, electronics, and cars, items that do not provide income or appreciate in value. Good debt is used to purchase assets that appreciate in value and provide cash flow. When you consider your debt, it is best practice to pay off your bad debts first, such as paying off your credit card before your rental mortgage. The old adage rings true “Borrow to invest, never to consume”, if you want to build your wealth.
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