Wealth Creation

A bird in the hand is worth two in the bush. A dollar in your hand today is worth more than a dollar tomorrow. The dollar invested today will earn interest straightaway. This is the time value of money. Hence there is an opportunity cost to resources that are idle and not utilised. The opportunity cost is the return that one would forgo by not investing it.

How do we create wealth with the limited resources we have? Money makes money. It will be wise to maximise on the return of the capital available. Hence given a project, the return is compared in terms of Internal Rate of Return or Net Present Value. The higher the IRR or NPV, the more favourable or attractive the project is.

There are many types of investments e.g. shares, property, unit trusts, bonds or managed funds. One could leave one’s savings in an interest bearing account or in a term deposit with a higher return (both low risk) or invest in shares (which are more volatile), listed property trust or direct property investment, etc.

One could invest using one’s own limited funds or one could additionally, borrow to make an even greater investment. The power of leverage and the benefit of negative gearing in Australia will give you greater mileage, extending your investment further.

A lot of Australians are sitting on a lot of equity in their existing properties which have grown in value in the last 4-5 years especially in major cities like Sydney, Melbourne and Brisbane. This is a great resource that can be tapped into for investment. One could use the security of the residential properties to borrow funds for investment in shares or property, etc. In general, Australians love brick and mortar. While there is sufficient equity in their existing property, they can borrow against it for new investments.

With the benefit of negative gearing, if the net rental income (gross rental income less property expenses) is less than interest costs, the loss sustained can be offset against other earned or business income. Hence as long as your cash flow allows, one can invest in a property and use the tax savings and rental income to service the repayment of the investment loan taken out. It does not work for everyone but for a lot of people who are paying lots of tax, it is possible to make use of the tax savings and rental income derived from an investment property to build up a passive income for their retirement. You need to have the equity as well as the serviceability capacity to make it work.

Over the medium to long term, as the capital asset grows in value, the equity will grow over time when capital growth rate exceeds inflation rate. Historically, well selected rental properties will create wealth faster for the individual compared to one who merely parks their savings in a safe haven like a cash management or term deposit account which will be taxed at one’s marginal tax rate. With capital growth no tax is payable unless your rental income exceeds the property expenses and interest costs. THERE IS NO CAPITAL GAINS TAX IMPLICATION UNTIL THE PROPERTY IS SOLD LATER ON.

For a free consultation please contact us to arrange for an appointment.