For long-time investor Peter Thornhill, using debt to his advantage has been the strategy through which he has built wealth. The 77-year-old has used the equity built up in the three homes he has subsequently owned in Australia since his return from working in London in 1988 to invest in the sharemarket and, he says, the result is that he paid off his mortgage “decades ago”.
Unlike Thornhill, Smyth advises clients to use debt recycling to invest for capital growth rather than yield, so favours investment in property rather than shares. He says the strategy is most suitable for a very particular type of client, people he describes as “wealth accumulators”. Ben Smythe, a partner and principal adviser at Minchin Moore, says strong cash flow is key to using debt recycling successfully.While acknowledging that debt recycling carries some risk, Smythe says steps can be taken to reduce it.
“A lot of clients, particularly in Sydney, have a pretty significant exposure to property through their own home. So we would typically suggest they diversify their overall wealth so that they’re not just 100 per cent in Sydney property,” he says. Property investment carries high transaction costs associated with buying and selling, such as stamp duty and real estate agent commissions, while there are also costs in maintaining a rental property, managing it and the risk of periods of vacancy. “You need to be alive to the fact that you’re investing in order to chase return and, on that basis, ask whether a particular investment makes sense,” he says.
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