Don’t jump into negative gearing without looking at the future first

Article supplied by HomeSource.

With the spotlight firmly on the property market, Pia Vogel, Managing Director of RentSource, asks the question… Is now a good time to negatively gear?

There are said to be 1.7 million property investors in Australia which means 1 in 7 people own an investment property. According to the Australian Tax Office 63% of investors are negatively geared and 75% of these people earned less than $80,000 per annum.

So what is negative gearing and why is it so popular? In a nutshell negative gearing is where the cost of owning, maintaining, and managing an investment property exceeds the income it generates. This means that the combined total of interest paid on loans, insurance, bank charges, property management fees, maintenance, repairs and capital depreciation, etc, are in excess of total income the property generates.

In short, that means that you are losing cash, so to make it worthwhile, there has to be an upside to the investment.

The reason people choose to opt for negative gearing?  Most often the reason there is a positive attitude towards negative gearing is that a negatively geared property can offer immediate tax benefits (offsetting high income or tax bills) while offering the prospect of capital appreciation over time. For those two reasons, negative gearing tends to appeal to some property speculators and / or people with a large tax bill.

But is now a good time to negatively gear?

With the property market getting a lot of attention in recent months after a surge in house prices, auction clearance rates, and home loan approvals, along with the Reserve Bank of Australia tipped to drop interest rates to a record low of 2% within the next six months -  everyone is talking about property.

The general principle is that when buying an investment property you should always focus on properties that will give you good capital growth and a good rental return. If that requires negative gearing then OK, but never set out to negatively gear.  Each property investment should stand up as a good investment on its own merits.

When considering negative gearing you should always look at the future and what may happen.

For example, interest rates go up by 2% but you cannot put up the rent that much.  Can you manage that cost increase with your current cashflow?  Do you have to subsidise it? 

Yes, interest rates are at a record low but they are not going to stay this low forever. And what happens when they rise? Inflation increases and with that, so do your outgoings.  Can you manage if there is a large expense that needs to be incurred, for example, replacing the hot water system? Meaning you stand to lose more from your savings than you may have thought when entering the gearing roller-coaster!

The biggest challenge faced but negatively geared property investors, is the ongoing management of their cash flows. So strategies to manage this exposure are always worth consideration.

RentSource, a new property management service has hit the market to help property investors make more out of their investments in a hassle-free way. 

RentSource provides its property management service with fees at half the price to anyone else in the country. RentSource uses the latest in systems and technology to drive management costs down and then pass the savings on to you. These same systems have been used to deliver home emergency services to thousands of property owners all over Australia for the last 8 years. Click here to find out more.

Joint Managing Director of RentSource, Pia Vogel explains “For years we’ve tried to work with property managers to help their clients save money with a range of products to help minimise the unexpected costs that always occur when least expected.  Now we’ve decided to make those savings available directly to property investors, and not just through the savings on management fees, but also the access to products that help mitigate those unexpected risks.”

If you are in a situation where you have to rely on negative gearing, plan for the unexpected and look for ways to help protect your cash flow. RentSource is a worthwhile option for those of you that want peace of mind that your property is in good hands should the unexpected occur.

Please note: This information is provided as general information only. Please consult your financial advisers to get specific advice about your situation.
 

Find out more about RentSource by visiting www.rentsource.com.au alternatively you can email info@rentsource.com.au or call 02 8197 1410.

 

The above information is supplied by HomeSource.
Disclaimer: while due care is taken, the viewpoints expressed by contributor and/or sponsors do not necessarily reflect the opinions of Your Investment Property.

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Comments
  • Chris says on 21/01/2014 02:39:23 PM

    Negative Gearing does not mean a property will cost money from the investor's pocket. By using the Income Tax Withholding Variation Form, a property can be negatively geared but have positive cashflow, especially where there is allowance for depreciation. A slight cost per week to offset capital growth can still see people realise greater than a 1000% return on their money. Do not be so negative!

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