You probably already know what negative gearing is. It’s a common investment strategy in Australia, with the latest ATO reports citing over 1.3 Million negatively-geared property investors nationwide. Just like in any approach, it comes with its own pros and cons. Let’s delve into Negative Gearing and discuss its implications when used. Does the good outweigh the bad? Let’s find out whether this is the right strategy for you.
Negative gearing is merely acquiring an investment property in which the gross income generated is less than the cost of owning and managing the investment. Simply put, you’re paying more for the expenses than what you’re receiving back as rental income.
So why even bother if you’re not going to earn more than what you initially invested?
Well, the whole idea of negative gearing is to benefit from it on the long-term. When the property value goes up, you will get more capital gains than what you’ve spent in maintenance, insurance, and interest rates expenses. In most circumstances, you can also benefit from getting a tax break from those expenses.
Yes - if you have adequate resources or disposable income to hold the property. The whole idea of negative gearing is you’re not going to profit from it immediately. You need to keep the property long enough for its value to go up. And to hold the property, you must earn a decent wage and have enough disposable income to cover the expenses without going into debt or worse, bankruptcy.
Firstly, you’re going to save money on tax. This strategy is extremely beneficial for high-income earners who pay 40% or more on tax; negatively-geared properties are a commonly sought investment for those wishing to reduce their taxable income. Even for middle-income earners and first home buyers, the tax benefits are plain to see and have allowed many working-class Australians to invest in property and pave the way for their financial freedom.
Secondly, negatively geared properties may become neutrally or positively geared as your rental value increases. When you start adding value to your property, your investment becomes more lucrative as you gain instant equity through renovations. Sooner or later, rents will increase to cover more of the repayments hence, the transition to positive gearing. Negative gearing will only make sense if your property increases in value. Generally, investors aim to offset their income losses using capital gains, which can grow higher than the amount of money you initially put into the property. Plus, these capital gains aren’t taxed, until you sell the property, solidifying the argument that it’s favourable for high income earners and landlords.
Negative gearing has its risks, and it’s not for everyone. Negative gearing can be a bad idea when:
-You don’t have a sizeable disposable income -Your property is not set to go up in value -There is no potential for development or renovation hence, no chance to boost your equity -When your portfolio is comprised of only negatively geared properties -When your goal is to gain passive income
As explained above, you don’t want to go spending more than you can afford – disposable income is a requirement if you wish to employ the negative gearing strategy. You could also lose money and gain nothing if your property and rental values aren’t set to increase. Plus, you will inevitably run out of money if every single one of your investment properties in your portfolio is negatively geared – sitting around waiting for a tax return is not a winning play! Lastly, you may want to reconsider if your top goal is to gain a stable, passive income. Unlike positively geared properties, negatively geared properties take time to grow in value, but when they do, you’ll often reap even bigger benefits.
It really comes down to looking into your financial capabilities, financial goals, your portfolio, and how you manage your property investments, turning them to your advantage.
A9 Property is a team of property specialists helping first time homebuyers and property investors on their journey into the real estate market. Our weekly real estate blog touches on industry trends, market shifts and investment strategy, providing you with valuable insight on your property purchase journey. We are experts who specialise in off the plan properties – a popular investment strategy in Brisbane and Australia. Check out our carefully selected portfolio of off-market properties for sale or contact us for an obligation-free chat to discuss the best strategy to start building your portfolio.