04 Nov 3 Questions You Should Ask Before Borrowing to Invest
Within your financial strategy, you may consider borrowing money so you can invest. Borrowing to invest, or gearing as it is otherwise known can be an effective way of growing your wealth. However, it’s not for everyone. If you are considering whether or not a geared investment strategy is right for you, start by asking yourself these three questions:
1. Am I prepared to invest in the long-term?
When it comes to any type of gearing strategy, it’s important to have a long-term perspective. If you borrow to invest you need to allow enough time for the value of your investment to grow, otherwise, it may not cover your costs of borrowing.
This means you should not plan to touch the money you invest for at least five years or longer.
2. Am I comfortable investing in shares or property?
When it comes to borrowing to invest there are two main options; investment property or shares and managed funds. This is because these asset classes can provide the capital growth needed to cover the costs of borrowing and help you achieve a profit.
3. Am I able to meet the loan repayments?
When you borrow to invest, you are taking on debt and this debt needs to be repaid. If you don’t have enough income coming in from other sources to meet the loan repayments, you may get yourself into hot water.
Considering your options
If you have answered yes to the above three questions, a geared investment strategy may be right for you. But before doing anything else, you first have to decide whether or not you would prefer to invest in shares or property. If you already have a financial adviser, consult them about which the best option for your financial planning strategy.
Many people are more comfortable with the idea of borrowing to invest in property because they have used a mortgage to buy their home. However, this requires a large capital outlay. Overall, the benefits of gearing in property versus shares are:
- The value of your property investment will not fluctuate as much as the value of a geared share portfolio
- There are more tax deductions allowable for an investment property, such as rates, repairs, depreciation of assets, etc.
Borrowing to invest in shares or managed funds that primarily invest in shares, can also be an effective way to build wealth. But it is not for everyone. Given share prices are more volatile than property prices the value of a geared share portfolio can rise and fall many times over your investment period. This could potentially magnify your losses.
Overall, however, borrowing to invest in shares has a number of advantages over property, such as:
- You don’t have to borrow as much to invest in shares as you do to invest in property
- You can achieve greater levels of diversification with shares
- If you need to access your money you can sell some of your shares
- Shares have lower transaction costs than property investing, for example, no stamp duty
- No ongoing costs such as maintenance or repairs or issues with bad tenants
Making gearing work in your financial strategy
There is a lot to take into consideration when deciding on the best way to grow your wealth using gearing. Speaking with a financial planner from Master Your Money Now can help you determine which option would be most effective given your personal circumstances.
If this is a topic that you would like to discuss in more detail, please go to www.MasterYourMoneyNow.com.au/getstarted to book in your complimentary 30-minute strategy session.
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Disclaimer: This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs. Past performance does not guarantee future returns.
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