Negatively geared property: it’s something we hear a lot about in investment circles. Debates are ongoing about whether negatively geared property investments are a better investment choice than positively geared properties.
In this article we will discuss:
- What is negative gearing?
- Is it better to be positive or negatively geared?
- Why pursue negatively geared property?
- Where to seek help
What Is Negative Gearing ?
Negative gearing occurs when you have borrowed money to invest in a property and the income from the investment is less than its expenses. That is, the rent doesn’t cover the expenses. This may seem counterintuitive as investments are supposed to make you money, right?
In the case of negatively geared properties, most investors do not expect to make money off them with regards to rent. Instead, negatively geared property investors are focused on the long term, capital gains a property stands to make.
In simpler terms, being able to sell the property for significantly more than it was purchased for – usually within a 7–10-year property cycle – is what investors in negatively geared property are in the game for. In most instances, the rise in the value of the property over time more than makes up for the costs associated with keeping it as a negatively geared investment.
Positive vs Negative Gearing
Positive gearing, as its name suggests is the exact opposite of negative gearing. Positive gearing provides an income via rent and after all expenses. Tax is paid on the gross earnings of the property each financial year.
Many seasoned financial advisors and investors will push for one strategy over another, while others believe a portfolio made up of both positive and negatively geared properties is ideal.
- A steady income stream from rent.
- Increased borrowing power as you are cash flow positive.
- Reduced burden of debt.
- Can help equalise losses from other negatively geared investments in your portfolio.
- Additional tax to be paid at end of the financial year.
- Slow capital growth due to most positively geared investments being in low growth areas.
- You may be relying on strong economic growth and low-interest rates, high occupancy etc. to make this strategy work. These things can change in an instant, particularly in areas reliant on industries such as mining or manufacturing.
- Can claim losses at tax time to reduce your taxable income.
- Capital growth should outweigh any losses incurred.
- Most negatively geared property is in highly sought-after areas, making it easier to secure tenants.
- Restricted cash flow.
- Reduced borrowing power as burdened by debt
- Capital gains tax when and if you sell your investment. You will be taxed on 50% of your financial gain.
Why Pursue Negative Gearing?
While making a loss is never the ideal scenario, in Australia, you are permitted to claim these losses as deductions against your taxable income, thus, helping balance out your expenses while you patiently watch your investment grow in value.
This is just part of the benefit of negatively gearing rental property. The secondary benefit is of course the long-term capital gains, as per tax strategists Pherrus:
“With house prices in Australia increasing by an average of 412% over the past 25 years, it’s easy to see how a negatively geared property can still provide a positive return over the long term.”
Negative gearing is best suited to those in higher income brackets who will not be easily overburdened by the short-term losses their negatively geared properties incur. They are also less likely to feel the pinch of cash flow challenges that negatively geared properties can represent.
It can take some careful planning to find the ideal balance with negative gearing that works for your portfolio and investment goals so having a trusted advisor in your corner is something we highly recommend.
Where to Seek Help About Negatively Geared Property
At Collins Mann, our qualified financial advisors can help you build a balanced property portfolio with negatively geared property and other investments. Our goal is to help you live a life of choice without compromise through intelligent investing and superannuation strategies.
Our expert advisors can walk you through all of your options and help you invest in the right areas to maximise your investment.
For all things related to negatively geared property or any other wealth management and growth strategies, contact Collins Mann today on (07) 3251 3200.