How can debt in form be a good thing? This is a common question when faced with debt but acquiring debt can certainly be a very good tool with tax benefits under certain circumstances that can help propel your investment strategy forward and afford you the opportunity to use the banks money to grow your wealth.
Living debt free certainly provides you with peace of mind but it is important to consider which debt to be free from and which debt can be used to further improve your financial position. In it’s essence, relieving yourself of debt on high interest debt like credit cards and personal loans or any debt on depreciating assets like cars and appliances that are financed.
Debt on appreciating assets on the other hand is a completely different animal offering you the opportunity to grow your asset base and increase your wealth. The best way to illustrate this is through a comparison of different circumstances surrounding property purchases.
Let us assume that there are 2 individuals, each with R1 million to invest in property. The first buys a property for R1 million and enjoys it debt free. The second takes the R1 million and uses it to buy four R1 million properties, each with a deposit of R250 000, leaving him with 4 bonds totalling R3 million.
Now we need to consider the value of these properties over a period of 10 years, which according to the PPI(property price index) for the past 10 years is close to 200% giving us a value of around R3 million for the property that was purchased for R1 million 10 years ago.
Let us compare the results assuming that the person who bought the 4 properties still has the R1 million in cumulative bonds and has only serviced the interest portion over the 10 year period.
Person 1 has a property worth R3 million less his R1 million input and he has made R2 million.
Person 2 has 4 properties worth R3 million totalling R12 million but still has bonds totalling R1 million leaving him with R11 million in assets. He would have paid around R1.4million in interest and assuming there was no income generated through rentals, leaving him with a net investment value of R9.6 million. If of course there was a rental income, this figure would be dramatically different again.
This clearly illustrates that with the wise use of debt one can significantly grow ones wealth.