Negative gearing is indeed a popular investment strategy for Australian property investors.

 

Negative gearing is when a property you purchase costs you money. The income you make from rent does not sufficiently cover the mortgage and your ongoing expenses such as property management fees, maintenance, insurance, bills and the like. You must fork out money from your own pockets to cover the expenses every week.

 

Positive gearing on the other hand is when you make money from a property every week. The income earned covers all your expenses for the property, and then some.

 

Negative gearing is by far the most common investment choice in Australia. There are a lot more properties on the market that are negatively geared properties to choose from.

 

So, let’s look at the pros and cons of this property investment strategy and see if it the one for you. Do note, this is not financial advice and any financial decisions should be discussed with your financial advisor or accountant as they differ for everyone.

PROS OF NEGATIVE GEARING

 

  1. Capital Growth

Investors choose a negatively geared property with the aim that the capital growth achieved from the property over the life of the investment will outgrow the costs. The capital growth gains you achieve will be higher than the costs you paid through negative gearing.

 

  1. Tax benefits

Negatively geared properties allow you to offset the losses from the property against your income. This effectively reduces your taxable income as any monies you have paid out to cover your expenses will reduce your taxable income at tax time.

 

  1. Grow Your Portfolio

As your negatively geared property grows in value, you can access the equity from the loan, allowing you to grow your investment portfolio faster.

 

CONS OF NEGATIVE GEARING

 

  1. Cash flow

As great as tax benefits are, the reality of a negatively geared property is that you need to pitch in cash every week to cover your expenses. There will be a benefit at tax time, however, you need to be aware that you need to cover extra costs on a week by week (or month by month dependent on your loan structure) basis.

 

  1. Market fluctuations

As much as capital growth is a pro, it can also be a con. With negatively geared properties, you are relying on the hope that there will be capital gains. In a slowing market, these gains may not be apparent, and your investment will need to be more of a long-term strategy. As long as you are open to the investment being a long-term strategy, you can wait for the market to turn to cash in.

 

  1. Serviceability

There is a limit that a bank will continue to loan you. You are limited by the number of loans that you can effectively service, based on your income. This can therefore limit your ability to grow your portfolio to include a number of investment properties.

 

There are our top three pros and cons to negative gearing when considering property investing. As we mentioned, it is best to discuss your investment options with a financial advisor to confirm the best strategy for you.

 

When you are ready to start looking at properties, call Angela for a confidential discussion about your investment opportunities.

Posted on Thursday, 31 January 2019
in Latest News

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