Negative Gearing has got itself a bad name in many property circles. I read many articles stating that negative gearing is stupid. So let’s look at what negative gearing means for an investor trying to grow wealth through property. In my experience it does not need to cost $100’s of dollars per week to support a negatively geared property, it may cost you a little or it may actually put money in your pocket.
Why would an investor knowingly buy a property that will run at a loss because the income (rent) does not cover all the expenses? That does sound stupid! However smart investors know that there are hidden benefits of buying a property using negative gearing. It does not have to cost you money!
Claiming the loss
All property losses (income – expenses - depreciation = loss) can be claimed back against your general income. Australia’s tax system recognises property investing is a business. That means as a property investor using negative gearing you can pay less tax .Why is our tax system so generous? In Australia, our government has not followed the social housing path like other countries. Our population keeps growing so our housing shortage increases. Someone has to fill the shortfall and it is the investors who meet the demand instead of the government. So think of negative gearing as the incentive offered to make this an attractive business opportunity.
Second income stream
With negative gearing, you can get a second income stream as the tax benefit or tax refund can be added to your rental income. The tenant and the taxman can be paying most or all of the property expenses. It does not all have to come out of your hip pocket.
This is usually overlooked by the critics of negative gearing. Yet this extra tax benefit or refund can be an effective way to manage the holding costs of property as you grow your portfolio. From my experience the less the holding costs the faster you can grow your portfolio. It is all about the cashflow rather than the gearing!
Negative Gearing and Positive Cashflow
This is the best secret that I discovered on my property journey. When the tax benefit is added to the rental income, the total amount received can often exceed the actual expenses incurred, resulting in a negatively geared property with a positive cashflow. This is where negative gearing comes to the forefront – the tenant and the taxman pay for the property and you still come out in front!
I prefer to look at the after tax weekly cashflow outcome of a property rather than the before tax negative gearing outcome when assessing a property as a suitable investment. It is not just the income from the rent that is important. Other factors such as the amount you borrow, interest rates, your tax rate, the level of property expenses (such as maintenance) and the amount of depreciation claimed can make a huge difference to your bottom line cashflow. It is negative gearing that allows these factors to be taken into account. Maybe negative gearing is not so stupid after all, especially if it puts money into your pocket as an investor.
Negative Gearing is not a dirty word
The reality is most investors have to use leverage (ie borrowing other people’s money) to get started. Building a large asset base for future passive income is more about buying quality growth assets than about short term rental yields. Many investors need the benefits of negative gearing to subsidize their portfolio’s holding costs. The hidden benefits and incentives offered by negative gearing may give you a more “positive “outcome than you first thought. As rents grow over time, as the property goes up in value, and the expenses decrease (eg interest rates going down) your return on investment (ROI) grows as well. Negative gearing is a useful tool in growing a portfolio not a dreaded disease.
My goal in this article is not to take sides and say that negative gearing is the best strategy. My aim is to help investors find the right strategy and understand how negative gearing can work to benefit them. I just want to make sure that investors know both sides of the story. For those wanting to know more please call me and request ‘Demystifying Positive and Negative Gearing’ and ‘Cashflow Positive Properties – Fact or Fiction’ past articles.
Lindy Lear is a successful property investor who had a late start into investing, yet has grown her portfolio to eight properties in three years. She is a qualified property advisor and general manager of Rocket Property Group, and she won the Reader’s Choice Award in 2009 for Property Investment Advisor of the Year. Lindy is passionate about helping others realise their goals through investing in property, and can be contacted at 02 8012 9669 or visit www.rocketpropertygroup.com.au
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.