A closer look at negative gearing

Property investment can be a very successful way of creating wealth so it’s no wonder that many Australians have made the plunge over the years into buying an investment property.

In very simple terms, negative gearing in a property sense occurs when the cost of owning a rental property outweighs the income it generates each year, creating a shortfall. This shortfall or “loss” can usually be offset against other incomes including your wage or salary, to provide a sizable return come tax time.

Having said that, a loss is still a loss, so the key to negative gearing is to make sure you invest in a property which will show good capital gain over time. You will require a sound future capital gain to offset the short term period where you will most likely lose money. Ideally, you want to ensure that you will end up with enough profit out of the eventual sale of the property to offset any losses you may have had along the way.

For this reason, planning ahead is key. The savvy investor should do their calculations, ensuring that costs such as interest rates, maintenance, and capital appreciation are all carefully considered before purchasing a negatively geared property.

Many first time investors will see property as a sure way to make money for a comfortable retirement but as some will argue, the only “sure” thing is the loss of money, if only initially, it’s something you be prepared for.

Negative gearing receives a lot of attention in the media and investment publications, so it’s only natural that many looking at investing in property assume that all properties need to be negatively geared; which isn’t the case. There has been a strong school of thought around having a positively geared property which needs to be considered.

In simple terms, positive gearing occurs when a rental income is greater than the ongoing expenses. It is an approach that suits people who are looking for an income stream from their property investments and means these individuals are not relying on only having a capital gain out of the property. The owner does however need to pay tax on profits generated from the property so that is something to be mindful of.

Many investment properties eventually become positively geared. This is based on the educated assumption that rental prices will eventually rise, while the repayments on the loan will tend to remain static depending on the interest rate environment of the time.  Positively geared properties tend to be at the lower end of the price scale making them a worthy consideration for the first time investor.

Though the negative vs positive gearing debate is nothing new, it seems to be getting a larger than usual amount of press in recent weeks relating to its effects on the tax system

The truth is, despite the negative press, historically, negative gearing has proven to be very successful investment tool for many Australians. But like any successful investment plan, as an investor you need to make sure that you are buying a balanced investment and not placing all of your eggs in the one basket.

Obtaining expert advice before you committing to any long term financial plans is crucial - contact one of our experts at Peard Finance on 9273 8955 for more information.