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Borrowing to invest Borrowing money to invest can increase returns but it can also increase risk. Interest must be paid on the borrowed money, but
Borrowing to invest
Borrowing money to invest can increase returns but it can also increase risk. Interest must be paid
on the borrowed money, but this can be offset by the income of the investment. If there is a net
loss at the end of the financial year, then negative gearing ie borrowing has occurred. This net
loss can be used to reduce the amount of tax paid on other income, such as salary or other business
income.
Imagine that you take out a loan of $ to add to your own savings of $ so that
you can spend $ on the investment property discussed on page In summary:
The property is expected to grow in value by pa
Your $ loan is interest only at pa meaning that only interest is paid back each
year and the balance remains the same.
Property costs are $ pa
Rental income is $ per month.
Your income tax rate is
a Find the amount of interest that must be paid on the loan each year.
b Find the net cash loss for the property per year. Include property costs, rent and loan interest.
c This loss reduces other income, so with a tax rate of this loss is reduced by Now
calculate the overall net loss, including this tax benefit.
d Now calculate the final net gain of the property investment for the following number of years.
You will need to find the value of the appreciating asset which is initially $ and
subtract the net loss for each year from part c above.
i year
ii years
iii years
You now know how millions of people try to become wealthy using compounding investment
returns with a little help from the taxman!
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