Real Estate Investor Magazine South Africa August 2016 | Page 20

DEBT MANAGEMENT Turning Bad Debt into Good Debt Leverage, Invest and Succeed BY NEALE PETERSEN Examples of Good Debt Good debt is generally debt that attracts a tax deduction because it has been used for a tax-deductible purpose such as acquiring an income-producing asset like a rental property or shares. In our current low interest rate environment that may not sound like much but it has a dramatic effect over the longer term. Mortgage bond debt Mortgage bond debt typically falls under the “good” debt category because it helps you maintain a strong credit history and there are tax benefits for your investment, which can be tax-deductible. Your house is also an asset that can appreciate over time and real estate ownership helps you build wealth. 
 
 Your education Your education is considered “good debt” because they often have low interest rates, they may be tax deductible, and they’re an investment in your future earnings. Over a lifetime, the typical college grad will earn $1 million more than the average high school graduate, according to the U.S. Labour Department. Your Business Many business owners avoid large real estate investments by renting or leasing their facilities. Other small businesses that own their own buildings, land or equipment can turn equity into cash by mortgaging the property to the bank, commercial finance company, savings and loan organization or insurance company of Bad debt Examples of Bad Debt While even “good debt” can have a downside, certain debts are downright bad. Items that fit into this category include all debts incurred to purchase depreciating assets. Some particularly notable items related to bad debt include: 18 AUGUST 2016 SA Real Estate Investor Credit card debt Credit card debt often falls under the “bad” debt category because you never earn a return on your purchases. In fact, making only minimum payments can lead to more debt (i.e. interest) over the longterm. 
Credit cards typically have higher interest rates than mortgage bonds, and carrying a lot of credit card debt can also lower your credit score. Car loans Car loans are usually regarded as “bad” debt mainly because the value of a new car depreciates immediately once you drive it off the showroom floor. Put your ego aside and pay cash for a used car, if you can afford to do so. If you can’t, buy the least expensive reliable vehicle you can find and pay it off as quickly as you can. Clothes, Consumables and Other Goods and Services It’s often said that clothes are worth less than half of what consumers pay to purchase them. If you look around a used clothing store, you’ll see that “half ” is being generous. In addition to clothing, vacations, fast food, groceries and gasoline, these are all items commonly bought with borrowed money. Every penny spent in interest on these items is money that could have been used more wisely elsewhere. Good Debt - How money works for you It is advisable not to risk real estate if the business is in a weak position within the market. When you offer real estate as collateral, you should have a solid business position. The real estate is simply the asset that leverages your business for growth through the liquid cash gained through financing. Prudent business owners will carefully consider whether www.reimag.co.za