Negative gearing is not an investment strategy despite what people say. What is negative gearing and why are so many Australian’s obsessed with it?
Negative gearing is talked about a lot when it comes to investing in property in Australia, but what exactly is negative gearing and why is it important?
Hey guys, I’m Ryan from onproperty.com.au and I help people find positive cash flow properties as well as learn more about investing in property. And you’re listening to lesson number 6 in our series on the Introduction to Property Investing.
So what exactly is negative gearing? Well, negative gearing is the opposite of positive gearing, which we talked about in lesson number 4. Basically, negative gearing occurs when the income of a property is less than the expenses. This means that you actually need to find extra money to pay for those expenses, which generally, is going to come from your job. But, can also be from other sources like, maybe a positive cash flow properties. Or, maybe you have other investments.
A property is considered negatively geared when the expenses are greater than the income. Now, at the time of this recording, losses incurred on a rental property may actually be used to offset your taxable income and help you save on the amount of tax that you pay. Obviously, see an accountant if you want to do this yourself. This isn’t to be considered taxation advise.
This can minimize the cost of holding a property and even turn a negatively geared property into a positive cash flow property if you include depreciation, which we’re going to talk about in the next lesson. But, there are talks about removing this. So, check with the government, check with your accountant as to whether this still exists when you’re listening to this.
Negative gearing is often called an investment strategy, but this is kind of misleading. Because really, when people say that they’re investing in negatively geared property, their strategy is actually capital growth. To make money negatively gearing a property, you actually must increase the value of your property more than the amount of money that you’re paying to keep it.
Let’s jump into an example to get an idea of how this works. Let’s say you purchased a property for $500,000 and you’re getting $500 per week rent for that property. But, overall, your expenses are actually $600 per week. Because you’ve got to pay your mortgage. You’ve got to pay your maintenance cost, council rates, insurances, all of this sort of stuff. So you’re paying $600, you’re making $500 per week.
So this property is actually costing you $100 per week or it’s costing you a bit over $5,000 per year in order to hold that property. So, if you’re just negative gearing that property, maybe you save some tax so you’re not losing $5,000, you’re losing a little bit less. But, you’re still actually losing money because you’re paying to hold that property. So you actually need that property to go up in value more than the amount you’re paying to hold it in order to make money.
This is why I say negative gearing is not actually a strategy in and of itself. Because if you’re just holding a property and you’re just losing money paying to hold this property and it’s not actually going up un value, well, you’re just losing money every single year. But, if that property goes up in value more than the amount of money you’re paying to hold that property, that’s when you can make some cash.
So that’s the very basics of what negative gearing is. It’s when the expenses of a property are greater than it’s income, which means you need to pay in order to continue holding that property. Now, negative gearing does get slightly more complicated when we add in the tax benefits that you can get as well as depreciation, which we’ll talk about in the next lesson.
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