If you’re looking into property investment for the first time you’ll probably come across the concept of negative gearing. While it can seem complex to begin with, with the right advice and with the right property negative gearing can be a very effective tax investment strategy.
Essentially the concept of negative gearing is when your costs for the property, including loan interest and bank charges, ongoing repairs and maintenance as well as capital depreciation, are more than the income you’re receiving from the property. At first glance, this can seem like a nightmare scenario for an investor, however there can be significant tax benefits from making a loss on your investments. The Australian Tax Office, for example, will allow you to offset these losses against other assessable income you might make. Another benefit of negative gearing is that the associated tax deductions mean that investors can borrow a large proportion of the cost of a property, and rent it out to cover the cost of the loan interest. This is a particularly useful for people who may have only a small deposit when they are looking to purchase a property.
There are, of course, other forms of “gearing” when it comes to assets: with so called “neutral” gearing, for example, the income you’re making is the same as the losses you are incurring, meaning that you’re not making a profit or a loss. Positive gearing means that the interest you are paying on your mortgage is less than the income you are bringing in from the property. Many property investors seek to find a property that helps them to into positive gearing territory – that is, the rent from tenants is higher than the costs associated with the property – however real estate experts often point out that these properties are difficult to buy nowadays.
Negative gearing is often considered a good investment strategy in a rising property market. This is because, despite the losses you may incur and subsequent tax offsets, your investment will be growing as an asset year after year. This can be a sensible outlook as long as the property market remains stable or rises. In a falling market, however, relying on negative gearing and capital growth can be problematic.
Lisa Montgomery, the chief executive of Resi Mortgage Corporation, believes that potential investors may be relying too heavily on the concept of negative gearing to provide them with property security, and instead should be focusing on buying the best, most suitable property for them, thereby creating real equity as an investment. When you’re looking at investment management, strategies such as paying more off the loan in a quicker period of time – thereby reducing the bank loan and interest – can help to increase and build equity over time. This equity can then even be used to purchase other properties as investments[i].
No one wants to go into property investing and lose money. Property investment for beginners should include financial and strategic advice from experts who can provide sensible solutions and ongoing help.