Discover some of the key factors to consider when borrowing to invest.
Australians are living longer and experiencing higher house-to-wage ratios.
It makes good sense to consider how you can achieve a comfortable
long term future.
1. Define your goal
Most of us want extra money to create a better life for ourselves and our loved ones. Setting specific goals and a time frame for achieving them will help you build a realistic plan. The strategies you’d use to achieve each goal will probably look quite different, too. Say your goal is that, in 10 years time, you’ll be receiving $100,000 p.a. in income from your investments so you can pay for your kids’ education and then give them a home deposit later on.
2. Compounding is everything
Compound growth means the more you invest early on, the greater your probable long-term return.
3. Embrace good debt
Winners borrow money for things that will increase in value. This means buying or improving an asset that can grow in capital value. You also need to be aware of which investments are tax
deductable and which aren’t. Losers pay high rates of interest to borrow for things that have no long-term value and no tax deductions – like clothes, a car or holiday
4. Shares or property?
If you borrow to buy property, it’s tangible, you get rental income, you’ve got the potential of capital gain and it doesn’t have the volatility of shares. Shares are liquid, the income can have franking credits to make it highly effective for tax purposes and when weighing up what will suit you best, you have to factor in set-up costs, regular fees and any costs associated with an investment class, as well as loan interest rates and the capital gains tax you’ll pay down the road. Include all these factors into your calculations and Whittaker believes long term, shares have greater potential capital gain than property.
5. Tips for borrowing to invest in shares
Most people already have a substantial investment in property – their home. Drawing down on their mortgage to invest in diversified asset classes may be a practical solution. It can be an effective way to build your equity so you have more money working for you sooner. Most lenders, strongly recommend that you invest your loan in diversified funds. To protect your investment, the approved vehicles are diversified assets like managed funds, EFTs
and separately managed accounts.
6. Tips for borrowing to invest in property
The vast majority of people buy property for capital gain rather than yield. Capital growth has been most prominent in capital cities, while the best yield tends to be in regional areas, so you have to know your goal before deciding where to invest. Another issue to consider is that capital growth has been highest for houses rather than units. Houses have performed better simply because there are more units than houses being built. REA’s search data reveals people still want to live in a big family home on a big block. People are willing to trade lifestyle to get it. And that’s behind the price rises in regional cities like Hobart and the Gold Coast.
7. Maintain a safety net
It’s important to maintain a safety net – or not to over-leverage. Borrowing magnifies whatever is going to happen. It’s also important to remember that, whichever asset class you choose, over time it will include dips as well as growth.
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Wednesday, 12 December 2018