Examples of leveraging in action

Leveraging Versus Not Leveraging:
	Non Geared	Geared	Negative Geared
Equity Invested	$40,000	$40,000	$40,000
Borrowing	Nil	$40,000	$80,000
Total Investment	$40,000	$80,000	$120,000
Income Received	$1,600	$3,200	$4,800
Interest Paid	Nil	$2,800	$5,600
Net Income	$1,600	$400	$800
Capital Growth (5%)	$2,000	$4,000	$6,000
Total Return	$3,600	$4,400	$5,200
Equity Invested	$40,000	$40,000	$40,000
Return on Investment	9%	11%	13%

EXAMPLE ONE

Say you have the opportunity to leverage into an investment property, borrowing 100% for $500,000.

Marginal tax rate (incl. Medicare Levy)		48.5%	31.5%
Purchase price	A	$500,000	$500,000
Holding costs monthly*		$390	$837
Holding costs over 10 years	B	$46,800	$100,440
Property value after 10 years assiming a 6% return	C	$895,542	$895,542
Your profit	C - A - B	$348,742	$295,102
Property value after 10 years assiming a 6% return plus 3% inflation	D	$1,183,682	$1,183,682
Your profit	D - A - B	$636,882	$583,242

If you put the holding cost amount into a savings account each month with a 5% return per annum, after 10 year your profit would be:		$62,075	$131,357

*Assuming a 7% interest rate, 5% rental yield and expenses of $10,000 (rates, body corporate fees etc.)

Pre-tax return required to break even on the mortgage repayments, assuming an interest rate of 7%:

Marginal tax rate of 31.5%	0.07 x (1 - 0.315) - 0.03 + 0.03	x 100	=	4.18%
	1 - 0.315

Marginal tax rate of 48.5%	0.07 x (1 - 0.485) - 0.03 + 0.03	x 100	=	5.62%
	1 - 0.485

Will the investment property grow at 4.18% or 5.62% per annum?

If prepared for higher risk, higher growth means... mortgage

EXAMPLE TWO

In order for Samantha to fund a $30,000 share portfolio with cash, she would need to save $468 a month for the next 5 years, assuming a return of 5% per annum.

However by restructuring Samantha's finance and title we have immediately accessed $30,000 and we freed up further cash flow.

If Samantha invests this $30,000 into the share market it will cost her $70 per month (assuming the 30c Tax Bracket, Interest Rate of 7% and Dividends @ 3%) = $4,200 over 5 years

Assuming the share market returns 9% per annum, in 5 years Samantha's share portfolio will be worth $51,544.95. This is a total profit of ($51,545 - $30,000 - $4,200) = $17,345

In 5 years Samantha will have cash of $17,345 and it only cost her $70 per month. THIS WOULD NOT BE POSSIBLE WITHOUT LEVERAGE.

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