Business Solution

Why invest and why take out an investment loan?

People’s needs for investment are as varied as the investment vehicles themselves. Some want to own their home outright, pay the kids’ university fees, or take world trips; while others want to start their own business or retire on a comfortable income.

The reality for most of us is that we won’t be able to afford these things on our salary alone (unless you’re fortunate enough to be the CEO of a major corporation). The key to successful investment is to leverage, that is, to use an investment loan to improve your capacity and increase your return.

Why invest in property?

Investing in property is the safest way to invest, but we also believe in a diversified portfolio to minimise risk. Similarly, Australians have trusted investment property as their favoured investment vehicle for generations – and with good reason.

We recognise the cycles, the incredible advantage that appropriate leverage (making capital gains from borrowed funds) offers, the benefits of rent return and taxation relief in servicing those borrowings, and the significant growth achievable over time. It is not unusual for ordinary investors to accumulate four or more properties over 10 years – and the financial flexibility and cash flow outcomes can be exceptional, giving you piece of mind.

Property allows you to leverage. With only $20 000 cash invested (plus around $10 000 upfront costs) it is possible to invest in a $200,000 property, making your earning potential greater.

Can you afford to invest in property?

The question should really be, “can you afford NOT to invest”, whether it be in investment property or some other form of investment? While everyone should be investing to give them more options in life, property investment may not be suited to everyone. Most people on a standard wage can service an investment loan. After all, the investment loan interest is first met by any rental income you generate. As a general rule there will only be a small shortfall on the interest on your investment loan. Traditionally the investment loan shortfall, as well as other costs relating to your investment property would be met by your personal income. Many investors however include a capitalising line of credit in their investment loan package so that they can draw on this to meet any shortfall costs as opposed to paying same from their personal income. Instead, they use as much of their personal income as possible, not to pay any shortfall interest on the investment loan but to make additional repayments to their home loan. This way their home loan is paid off much more quickly.

With your investment loan you should also remember that negative gearing does deliver some relief to servicing your investment loan on the way through. While most investors will wait until the end of the financial year to claim their tax deductible shortfall you can in effect claim the investment loan shortfall on a monthly basis. Check out the ATO website on deductibility of interest on investment loans.

What history can tell you about property

History shows us that all property whether it be investment or owner occupied doubles in value every 7 to 12 years. Each property market is cyclic, that is, it goes through times of fast growth followed by little or no growth. When one market eg Sydney is in strong growth, other markets eg Brisbane will be in a little or no growth phase. The markets are referred to as being counter cyclic – when one is doing well, another is doing not so well.

This means for example that when the Sydney’s growth slows, Melbourne’s picks up followed by Brisbane. This is the reason we emphasise the importance of investment property as a mid to long term investment. The key however is to identify the markets with the highest probability of short to medium growth and lowest probability of downside risk. This enables you to build equity faster and therefore add to your investment property portfolio.

It also means that there are always new opportunities for investment property as there are always markets somewhere which are experiencing their growth phase. Choosing investment properties in growth markets assists in developing well-balanced, diversified portfolios.

Property in the future

In the past all property was good investment property, and a lot of people did very well out of it. While those days are gone, there are still exceptional opportunities for investors who understand the current market influences such how our population is changing, how family size is changing, how types of employment are changing, and how the economy is changing and what influences it.

So why wait? Research property – buy with your head not your heart – be an informed purchaser and most importantly make sure your investment loan is also working for you.

INTRODUCTION

Addressing to the Indian Economic Summit’s session, on Tuesday, the 18th of Nov. 2008, the State Minister of Industry, Mr. Ashwini Kumar declared that Rs 500 billion would be invested by the Central Government with public-private partnership in infrastructure pertaining projects. According to him this investment would lure demand to boost economic growth. In the prevailing time when Indian economy is under threat of the entrance of world depression 2008, such type of a big dose of investment in infrastructure is desirable to barricade against the entering depression. But, the private partnership may hamper the way of receiving the desired results.

INDUCED INVESTMENT

When talking about investment, it is categorized as the induced investment and the autonomous investment. Induced investment is that investment which is induced by profit motive in a free enterprise capitalist economy. It produces commodities and thereby it can be termed as ‘directly productive investment’. Establishment of a productive unit which produces consumption or capital goods comes under the category of the directly productive investment. It changes with a change in (national) income that is why it is also called income elastic investment. Induced investment is incurred especially to produce larger output.

AUTONOMOUS INVESTMENT

On the other hand, the autonomous investment is the investment which is not induced by profit motive. It is not sensitive to changes in income. It is also known as public investment and is incurred in direct response to inventions and much of the long range investment which is only expected to pay for itself over a long period. Autonomous investment is generally associated with such factors as introduction of new production techniques, new products, development of new resources or growth of population. Autonomous investment generates favorable environment for production. An autonomous investment is never profit motivated and that is why it is always suggested to be undertaken by government instead of private investors. Autonomous investment does not directly produce goods. It creates external economies whereby the cost of production sustained by the producing firms is lowered. Thus, their profit is increased whereby the firms are induced to produce more. In this way the autonomous investment indirectly helps to increase production. Moreover, autonomous investment generates general utility services to the general public which they can’t afford to purchase.

DUAL INVESTMENT

Autonomous investment is autonomous only to the extent it is free of profit. If this investment is made by private investors they can’t help earning profit. Therefore, the producers will have to pay for the external economies and the general public will have either to go without the generated general utility services or will be exploited for they will have to pay high to avail the services. Thus, in a developing economy where cost of production is high, general mass is poor and markets are undeveloped the autonomous investment will lose its importance if given in private hands. In this way, autonomous investment is made of two different portions. One is that which can never be given in private hands irrespective of the fact whether the economy is developed or developing. Therefore, this portion of autonomous investment is a true autonomous investment. The investment incurred in the projects pertaining to national security, law and order maintenance, international relations, world peace, general governance, epidemics eradication, general health, poverty alleviation, public welfare etc. comes under this type of autonomous investment. The remaining portion of autonomous investment is that which can be (and is generally) given in private hands in a developed economy. In a developed economy sufficiently a high level of income is achieved, the distribution of income is almost equal, market is extended and developed, general poverty stands alleviated and cost of production is quite low on account of capital based modern technology. Hence, the producers can easily pay for external economies and people can pay for many of the general utility services. Therefore, in a developed economy, the portion of autonomous investment to be incurred in the projects like road transport, construction of highways, construction of bridges, power and electricity, civil aviation, sea transport, education etc. can be (and generally is) given in private hands. This portion of autonomous investment, being however similar to the previous one (above said true autonomous investment) in a developing economy, but thus becomes profit motivated and is converted into induced investment in a developed economy. In other words, this portion behaves as autonomous investment in a developing economy but is converted to and starts behaving as induced investment in a developed economy. Therefore, this portion of autonomous investment can be regarded as the convertible investment or the dual investment.

CONCLUSI ON

            The above  concludes that investment can be categorized as the autonomous investment, the dual investment and the induced investment. The autonomous investment should be exclusively incurred by the government in both the developed and the developing economies and, similarly, the induced investment should be incurred by private investors in both the economies. As regards to the dual investment, it should be incurred by government in a developing economy and by private investors in a developed economy. However, a partnership of government and private investors may be desirable in case of the dual investment if the economy has entered into the stage nearest to the full development. It is similar to the case of the partnership of government and private investors in induced investment in early stages of development in a developing economy. The Indian economy seems to have travelled though a long on the development path but it has not so far achieved such a high stage of development which may allow private hands to participate in the dual investment. General poverty still persists there, income distribution is highly unequal, technology is not fully capital based, cost of production is high, and much more. Therefore, the dual investment in Indian economy still needs to be incurred exclusively by the government. Therefore, the partnership of government and private investors in case of the declared investment worth Rs 500 billion, referred to in the beginning hereof, is not desirable. The loss to the producers and the poor general mass on account of so far brought about privatization of the past is not a latent fact. All the same, if the government somehow feels itself helpless to desist from accepting the partnership, it must not at all allow it beyond the dual investment. In more clear words, the Government of India must keep the (true) autonomous investment fully intact from the private partnership and may allow the partnership in the dual investment but only to a limited extent if the partnership can not be fully abandoned.

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