Why Borrowing to Invest Makes Sense!
(or why should I speak with an experienced Financial Advisor)
Wealth Creation by Harold Upton BSc (Hons) Dip FP - November 2006
Borrowing to Invest - Gearing or Leverage
The ability to borrow against an investment for its purchase has two advantages;
- The costs incurred are tax deductible (that is the real cost of the borrowing is reduced); and
- The investor receives 100% of return but is only required to pay for a small percentage of the investment:
So how do we make it safe?
- Assess the investor's specific risk profile;
- Find an investment that is suitable for gearing and for the investor;
- Understand that risk can be raised or lowered by raising or lowering the level of borrowing and adjust accordingly;
- Realise that gearing can create a bigger profit for the investor but has no affect on the return of the investment.
What about Taxation
Tax has an impact on the real return of an investment;
- Growth is better than income because;
- Tax is deferred - you only pay when you sell;
- You choose when you will pay tax (ie when you will sell); and
- Tax is reduced - 50% of capital gain is tax free;
- Some forms of income are more tax effective than others;
- Shares can provide tax paid income; and
- Borrowing and investment costs are tax deductible; but
- Many tax minimisation schemes are BAD investments;
- If your prime objective is to save tax - donate to charity!
An investment should never be chosen because of a tax benefit! An investment should be chosen because
- It is a sound investment in its own right; and
- It is a suitable investment for the individual purchasing it.
How do we improve the Investor's Return - your Profit $$$
- We need to identify;
- The real cost of a specific investment or investment Strategy (capital invested, and costs to borrow, hold, manage, transfer etc);
- The real return (after tax, after costs, after inflation).
- Using these strategies an investor can often make a bigger profit by having;
- More invested into a lower yielding investment (borrowing to invest) than less in a higher yielding investment;
- Maximising tax advantages; and
- Reducing the real cost of investing.
The aim is to maximise the Net Return (Profit) received by the Investor (within clearly identified risk parameters)
Do you want to explore the benefits of borrowing to invest?
Do you want to see how you can save tax and create wealth without risk?
If you do please call our Wealth Creation expert Harold Upton now on 0408 000 555.
DISCLAIMER: This example is based on one set of variables - a different set of financial circumstances may give a different result - CONSULT a Financial Planner to confirm what is best for your personal circumstances.