Not all debt is bad. In fact, I’ll go as far as saying there is some debt that I bet you wish you had. To put this into perspective for you I’m going to share a little story.
My parents came to New Zealand 50 years ago from the UK. This is going back to the 1970s which really isn’t that long ago.
They paid $13,000 for a house in Christchurch. Now, these days you’d probably spend more than that on a car. This is not even going back multiple generations. The house itself was a little three bedroom family home.
Now fast forward in time, one day about eight years ago I was browsing through The Realtor which is a property magazine, and I saw this little house.
My family had long since moved on from the house but there it was in the magazine – the very first house we lived in when we first arrived in New Zealand when I was only five-years-old!
How much was it selling for I wondered? I looked at the price. Wow. It was on the market for $485,000.
I did a quick calculation – if property doubles in value every seven to 10 years, that’s a compounding growth rate of 7.2 per cent.
The maths was correct almost to the dollar based on what my parents paid in the 70’s to the price the property was listed for at the time of sale.
I remember ringing my Dad…
“Hey, dad, do you remember we lived in 22 Charlotte Street, Avondale when we first came to town?”
He replied, “Yeah, yeah, yeah. Of course I do. Why?”
And I go, “Guess what? It’s on the market today for $485,000.”
Now of course, he’s also moved with the times, but if you’d said to my parents in 1970, “This house is costing you $13,000 and some day it’ll be worth almost half a million,” that would have blown their minds! They could not have comprehended that.
If my parents had bought that as an investment property, and still owned it, and still owed $13,000 on it, do you think that debt would be considered bad?
No. That debt, over the course of 50 years has actually gone on to make money, and in this case that’s an incredible $472,000.
Could you imagine the same scenario in Auckland?
What if your grandmother in Auckland bought a property 30 years ago and she paid $300,000 on it, but never paid off any of her debt.
Let’s say she stayed on interest-only payments. Would you be pissed off she still had debt owing on a property that’s worth over a million dollars? Of course not! If anything, you’d be thanking her.
Let’s look at the present tense.
If today you take on property debt of half a million dollars, think about what the value of that property will be in 30 years.
People come to our events all the time with the mindset that there’s a ceiling, and a property will never achieve the increases that it has in the past.
In fact, one guy a few years ago in Wellington said the he didn’t believe the average Kiwi household would ever be worth a million dollars because that was just too ‘unrealistic’….
Hmmm really? Just a few short years later the average house price in New Zealand was a million bucks!
I remember saying to him back then that a good way to look at it is to look at your next biggest city. And by that I don’t mean if you’re in Wellington you might look to Auckland, but if you’re in Auckland, you would look to Sydney. Then you go global.
They DEFINITELY would have kept it!
Again, imagine my parent’s thinking if they were told how much their $13,000 property would be worth in years to come. q
So if you were even a little bit concerned about accumulating debt as a property investor, I hope this has helped to put a few things into perspective.
The fact is that not all debt is bad and some debt, when structured correctly and under the right guidance of a property expert, actually works for you and has the ability to generate great levels of wealth.
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