A carefully constructed Gearing Strategy can be used to accelerate the process of wealth accumulation by enabling you to make larger investments than would otherwise be possible.
Gearing simply means there is some type of loan involved in the investment. It is possible to gear, or borrow money, to purchase both shares and property. It is important that investments are affordable and have strong growth potential when geared.
Historical performance of growth based investments such as direct shares, property and managed funds have delivered higher potential returns over the long term than cash based investments, making gearing an effective long term strategy for growing wealth.
Borrowed money can be used in a number of ways including acquisition of direct shares, property and managed investments. Gearing is only effective if the after tax capital gain and income return of the geared investment exceeds the after tax costs of funding the investment.
Gearing can magnify gains but only if the net gains from your investments out weigh the cost of borrowing over the term of the loan.
Gearing Strategies are no different to any other initiative taken to improve your financial position – Requiring careful consideration against the backdrop of all other financial matters relating to your circumstances.
At Nexus we explore a range of gearing strategies for our clients depending on their individual financial circumstances.
| Examples of Gearing Strategies | |
|---|---|
| Negative/Positive Gearing | Instalment Gearing |
| Margin Lending | Internally Geared Funds |
| Double Gearing | Equity Lending |
| Instalment Warrants | Limited Recourse Lending |
In order to benefit from the long-term growth, you must be able to retain your investment (and service the repayments) during any short-term market fluctuations. Thoroughly researched asset selection and implementation of a cash flow management plan can mitigate the risks of prematurely realising losses.
Negative gearing into direct property investments is a popular strategy used by many Australians.
Asset selection
Don’t fall into the ‘YIELD TRAP’! With a back-of-the-envelope calculation, most people assume that if the income covers the holding costs, it must be a good investment. Even if they have calculated a TRUE NET YIELD, this is not the measure of a good investment. The difference between 5% capital growth and 6% capital growth, on a $500,000 investment over 20 years, is a staggering $331,275 in profit. Yield is important as it relates to your ability to afford holding the asset, however, once this requirement has been met, the primary driver for a successful gearing strategy is capital growth.Read our recent article on ‘Yield or Growth: What’s Driving your Investment Decisions‘ here
Failing to crunch the numbers
Accounting for all the expenses including interest paid on mortgage, council rates, body corporate/strata fees (if applicable), insurances (landlords, building), maintenance costs, property management fees, and depreciation allowances, is critical to accurately assess affordability.
Failing to (or not eligible to) claim depreciation expenses
Depreciation is an expense that can be added to the actual expenses of your property, increasing total (nominal) expenses, and therefore increasing total tax deductions. It’s important to understand that depreciation is an ‘Expense on Paper’ and not necessarily a true expense to the investor. Therefore, depreciation claims can have a positive impact on your cash flow.
This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. We strongly suggest that you seek professional financial advice before acting.
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Nexus Private Wealth Management is made up of the following companies: Financial Planning Advice is provided by Nexus Private Financial Planning Pty Ltd – ABN 58 159 649 055. Authorised Representative of Madison Financial Group Pty Ltd (MFG) – ABN 36 002 459 001 (AFSL No. 246679) | Investment Property Advice is provided by Nexus Private Property Servies Pty Ltd – ABN 52 159 828 038 (REA no. 3565454) | Lending services are provided by Nexus Private Lending Services Pty Ltd – ABN 37 169 705 926 (ACL no. 463839) | Accounting and Taxation services are provided by Nexus Private Accounting Services Pty Ltd – ABN 84 169 784 329 (RTA no. 25331778)
Information contained within this website is general advice only. We have not taken into consideration any individual circumstances and suggest that no person act on the basis of this information without obtaining professional advice as to how it applies to their own personal circumstances. All content appearing on this website is proprietary, copyrighted and owned or licensed by Nexus Private. Any unauthorised use of content from this website is strictly prohibited. All rights reserved.
