Article supplied by Crawford Realty
Positive vs negative property – know the facts before choosing your strategy
There has long been ongoing debate among property investors, industry thought leaders and economists when it comes to positive and negative gearing.
Views are polarised over which strategy is best, which delivers the better return and whether negative gearing as a tax break should exist at all.
Many within the property investment industry remain steadfast in the negative gearing camp, but is it the right strategy for investors in the modern age?
Negative gearing is not an investment strategy, it’s a tax strategy - and a limited one at that.
Negative gearing is a strategy based on losses. It requires you to top up the rent you receive with your own money in order to pay the mortgage. The taxation office allows you to deduct these losses from your taxable income, thereby reducing your tax. BUT the tax savings, generally received upon lodging your return each year, DO NOT cover your losses.
Even with the tax benefits, you are still putting more of your money into the property - every single month. Simply, negative gearing is a deficit strategy that requires the constant and ongoing input of your own funds to keep the ‘investment’ going.
In contrast, positively geared property by definition generally services all the holding costs of the property and earns the investor a net profit.
While these points are the two obvious differences when considering negative or positive investing, there are several others that you should be aware of before taking the plunge down the negative gearing route.
Forget leaving the workforce Stable, consistent income is vital in order to service loans on negative properties as the rental income isn’t enough. If your salary decreases or you lose your job, what position will you find yourself in? Is it likely you would default on your loan and potentially lose your property? During times of increasing job uncertainty, this can be a risky approach to your investment plan.
Positive property not only puts extra cash in your pocket every month, it also acts as a financial security measure. If you lost your job tomorrow, you would still have the passive income from your positive portfolio coming in.
Portfolio growth is reliant on capital growth cycles. After purchasing a negatively geared property the only way to continue to invest without injecting more of your hard earned cash is by using equity from an existing property. Equity is created when the value of your property increases. To use equity as a deposit on your next purchase, the value of your property needs to have risen substantially. Based on historical performance, long-term property growth in Australia is considered a sure bet, but it can take many years for a negatively geared market to receive substantial growth. This can dramatically impact your ability to purchase multiple properties.
It’s not flexible. A negative gearing strategy relies on capital growth to deliver a return to the investor - this makes it a long term strategy. You might be forced to hold onto a property much longer than you had expected to because of slow capital growth cycles. It reduces both the liquidity and flexibility of your portfolio. Positive property delivers you a cash return from day one – offering positive return on investment even during period of zero or little growth.
Portfolio growth is restricted by serviceability. Many new investors struggle to understand how some are able to build large property portfolios quite quickly while others are stopped in their tracks after just two or three. The difference – serviceability!
Even high income earners will eventually hit a ceiling if they pursue a negative gearing strategy. There is only so much of one’s salary that can be funneled into servicing loans on investment properties. Investors on lower incomes can hit this ceiling very quickly and portfolio growth will come to a sharp standstill.
With each purchase of a positively geared property, your passive income stream increases. You will continue to improve your financial position in the eyes of most lenders and your capacity to service your loans increases.
Whether an advocate of positive or negative, it’s important to remember that each strategy has a vastly different path and outcome. When deciding the best path for you, do your research. Review the stories of other successful investors to ensure the direction you choose will ultimately lead you to your wealth creation goals.
For more information, please download a free positive property report.
The above information is supplied by Crawford Realty.
Disclaimer: while due care is taken, the viewpoints expressed by contributors or sponsors do not necessarily reflect the opinions of Your Investment Property.
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