Borrowing to invest, or gearing, can be a powerful means to building wealth. Gearing allows you to increase your ability to create wealth by enabling a higher level of investment than would otherwise be possible. You can either positively gear or negatively gear your investment.

Positive Gearing occurs when you borrow to invest in an income producing asset and the returns (income) from that asset exceed the cost of borrowing.

An example would be if you borrowed to invest in shares, and the market then boomed to the extent that the increased income generated from your shares exceeded the expenses of the loan.

Negative gearing occurs when you borrow to invest in an income producing asset and the cost of borrowing exceeds the returns (income) from that asset.

Negative gearing on a rental property, for instance, occurs when the annual interest payable on the loan used to acquire the property, plus other expenses incurred in maintaining the property, exceeds the annual rental income the property generates. This means that you are making an income loss on the investment.

The reason negative gearing can be attractive is that under current Australian Taxation law (as at 5 December 2001), an investor may be able to claim a deduction for the loss, which can be offset against other taxable income, such as salaries, business income or other investment income. In the long-term it is expected that the total returns from the investment, including Capital Growth, will be greater than the short-term income losses. However, if sufficient Capital Growth does not occur, you may be worse off overall.

Negative gearing isn't suitable for all investors. Although it may potentially lower your tax liability, the tax implications will depend on your personal situation, and the type of investment you choose. You should seek independent financial advice before investing and gearing.

Gearing to invest is easier than you think, and there are a variety of ways to do it. To ascertain whether gearing is a strategy that would fit your investment profile, please contact our Senior Financial Planner, Andrew Coates, for a cost and obligation-free first appointment.