USING GEARING TO YOUR ADVANTAGE IN PROPERTY INVESTMENT

For most people, the purchase of an investment property will involve some gearing. Gearing refers to the finance of the investment where part or all of the purchase is funded by borrowing money. As a strategy this can significantly increase the returns you can make from the investment – but it will also magnify your potential losses.

Before you embark on any investment, it is important that you have a good understanding of gearing and how it works. This will help you take advantage of the increased returns and how you can minimise the associated risks involved.

The following illustrations highlight the impact of gearing on your potential investment returns. If I have $10,000 to invest and receive a 10% return, illustration 1 shows the return I can expect – equating to a 10% return on the $10,000 I originally invested.

Illustration 2 shows the impact of gearing where I borrow an additional $90,000 to invest. The end result is a return of 40% on the $10,000 I originally invested.

The key to making gearing work in your favour is that the rate of return on the investment must be greater than the interest cost of the borrowings. In the illustration above, the return is 10% and the cost of borrowings is 6%.

It is also important to understand that the use of gearing also increases the risk involved. Remember the old adage, the greater the return, the greater the risk. While we have increased the return from 10% to 40% we also now stand to lose up to $100,000 if things go wrong rather than just the $10,000 of our own money that we have invested.

Negative Gearing:

Negative gearing describes the situation where the investment is structured in such a manner that the expenses and interest paid are greater than the income generated by the investment. This results in a loss - and a tax deduction.

We saw in the illustration above that to make gearing work in our favour, the return must be greater than the cost. To achieve this with a negatively geared investment, we need to increase the returns by some capital growth. The combined income and capital growth make up the total Return on Investment.

Therefore, the potential for the property to earn capital growth is a major factor in the overall return from the investment. Given that this is an unknown, it can also be a major risk factor. If you have a negatively geared investment, and you do not get any capital growth, you will lose money on the investment.

Our Analysis

If you are looking at an investment property, you need to understand the impact that the capital growth has on the returns you can expect. At ATM Consultants, we can analyse your property investment proposal and show you the impact of the capital growth on your overall returns and risk.

Creative Real Estate Marketing

photo: Ravi Karandeekar via photopin

Looking for a Property Investment with a guaranteed return where all the work is done for you. Great property, great location, finance approved, tax savings for you, everything is looked after for you. You can even use a self managed super fund and you won't need any of your own money. Sound too good to be true? Well it probably is.

We have seen a lot of our clients being approached by "Property Investment Specialists" to help them create wealth for the future by setting them up with a property investment. There can be some great advantages in investing in property, but make sure you do your homework before committing yourself to anything.

Too often these "investment opportunities" are little more than a marketing ploy to sell the properties. The promoter of the scheme is only going to get paid if you invest and that means that you are unlikely to be receiving truly independent financial advice. Remember, your personal situation will have an impact on the effectiveness of the investment and there may be tax advantages in structuring the investment in a particular way.

If you get such an approach, contact our office at ATM Consultants Pty Ltd, and we can review the proposal for you. We have the tools to analyse the proposition, and we can highlight the major risk factors and the key elements to look for to maximise the investment in your situation. We will analyse which entity should own the property ie, should it be one partner, joint owners, a family trust or maybe a self managed super fund. If you need the assistance of other experts, such as solicitors, finance or quantity surveyors, we have a network of professionals that we have used before and we can refer to one of those. We don't receive any commissions or referral fees because we think it is important that you receive sound independent advice.

Let me know if you have had a phone approach lately, or maybe you have been to a seminar.

Company Reporting Season

For all of you with an interest in the sharemarket, you will know that Company reporting season coming up. Annual Reports and meetings always give us a good insight into the management of the companies we own shares in.


CPA Australia have released a really good guide to help you understand Company reports. You can access it by clicking HERE

GST Increase on the way????

I attended a talk last week where the speaker suggested some increases to the GST rate to remove a range of state taxes that are an impediment to productivity. I also read one commentator today suggest that one way to fund the Education reforms from the Gonski report would be to increase the GST.

That is twice in one week.

A quick search on the internet and I found a lot of articles espousing this as a way to fix a whole range of funding issues.

I also note that the average current unweighted avereage GST in the OECD countries is up around 21%.

I think I can see what is coming!!!

Faster, Stronger, Higher

The games start tomorrow and I will be glued to the TV over the next couple of weeks. The traditional motto of the Olympics is Citius, Altius, Fortius, which is Latin for "Faster, Higher, Stronger" - and for me that makes the Olympics all about track and field. 

I am happy for the other sports to be there but I am not sure that they all fit with the true Olympic tradition. No where does that traditional motto include the words: Syncronised, Graceful, Artistic, Owner of the best equipment, Most Liked by the judges etc etc.

Virgin now a real Airline

This week we flew to the Sunshine Coast and because there was no real choice, we flew Virgin for the first time in a few years. My previous experiences with Virgin have not been great but I was pleasantly surprised this time. It seems that Virgin has become a real airline. The plane was comfortable, the seats were wider, there was space in the overhead lockers for everyones carry on luggage and there was no sign of that old blue and red decore. Both flights were on time, and the service on board was very good. The hosties were more mature and professional in their look and approach. It seems that we no longer have to put up with that immature comedy act the "out there" hosties used to put on to a captive audience. I would be much happier to fly Virgin next time.

Bureaucracy gone mad!

Tried to transfer a business name for a client today. However, earlier this month the business names register was changed from the states to a central national register maintained by ASIC. As part of the process, each business name has been given a new ASIC KEY - an identifying number - and we need this to deal with ASIC. However, the only people who know this key are ASIC. So we have to set up an account with them (as well as the one we have for dealing with companies) to enable us to apply to them to be told the key so we can then deal with the company name!!

This is crazy enough but I cannot believe we have invented another number. Now a company is likely to have 5 different numbers  for dealing with 2 government departments. They are:

1.     Tax File Number

2.     ABN

3.     ACN (Australian Company number)

4.     Corporate Key (for dealing with ASIC)

5.     ASIC Key (for dealing with ASIC in relation to business names).

No wonder we need so many public servants to keep track of this.

AFL: Time to decide on the Bounce

I think it is time the AFL makes a decision on the bounce. It has been a long traditional part of our game and there are good arguments to keep it. But I think if we are going to keep the bounce, then we need to accept that it won't go straight up all the time.

If we think that a ball going straight up is critical to the contest, then it would make sense to get rid of the bounce and just throw it up. At the moment we have this ridiculous system where we bounce it, but if it doesn't go straight, we call it back and throw it up. So why bother bouncing it in the first place? 

Sports Greats: People who revolutionized their sport.

Walter Lindrum

This is a great topic. We often talk about champion sports people. But there are some who did something that revolutionized their sport:

Simon Anderson - the man who put a third fin onto the surfboard. 

Dick Fosbury - the man who changed the way the high jump was done with the Fosbury Flop

Jack Dyer - invented the drop punt kick in football. This kick is now used almost exclusively in the game.

Walter Lindrum - Became so proficient at Billiards that they changed the rules to make the game fair on everyone else.

Jack Brabham - came up with the idea to put the engine in the back of his racing car, and changed formula 1 forever.

Ben Lexcen - the Americas cup yacht designer who came up with the famous winged keel. A bit like Simon Andersons third fin.

Feel free to add some more in the comments below.