Borrowing To Invest In Shares Versus Property
When it comes to borrowing to invest there are two main options; investment property or shares and managed funds. Although both options can help you grow your wealth in the long-term, the implications of borrowing to invest in property versus shares can be quite different. So before deciding which option is right for you itâ€™s worthwhile taking a closer look at each option.
Start with the right intentions
When it comes to any type of gearing strategy, itâ€™s important to go into it with the right intentions. This should be to invest in a quality asset that you believe will grow in value over the long-term.
Even though gearing may be tax effective, it will only be profitable if the value of your investment grows enough to cover the cost of borrowing. This is why the quality of the asset you choose is extremely important.
Borrowing to invest in property
Most people are more comfortable with the idea of borrowing to invest in property than they are of borrowing to invest in shares. This is understandable given that most people have taken out a mortgage to buy their home. However, when you borrow to invest in property there is a lot more to take into consideration.
Firstly it can take a long time before you realise any financial gain from a property investment. In the meantime you need to be able to meet the costs associated with maintaining the property, such as maintenance costs, estate agent fees and council rates. There are tax breaks available when these costs exceed your income, but that shouldnâ€™t be the main reason for choosing property over shares.
Overall, the advantages of borrowing to invest 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 investment property, such as rates, repairs, depreciation of assets, etc.
Borrowing to invest in shares and managed funds
Borrowing to invest in shares, or managed funds, 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.