Expert Advice with Lindy Lear. 19/09/2016
Using OPM - other people’s money
Gearing is when you borrow money to invest with the goal of achieving a capital gain. Only a few people buy property with their own money. Most investors use the principle of borrowing ‘other people’s money’ (eg the banks money), and use a 10% - 20% deposit. This allows investors to build an asset base using the principle of leverage that can create wealth and a passive income for the future.
If the costs of owning the property are higher than the rent, it is said to be negatively geared. The costs include the interest on loan, rates, insurance, maintenance, strata fees and property management fees. These costs can be quite stressful for investors when they find that the property may be costing them $100 - $200 a week or more to hold.
When the negative gearing benefit is claimed against your taxable income, some of the holding costs can be alleviated. Basically you can claim a tax deduction on the loss so that the costs are minimised by the tax refund received.
Taxation strategy or wealth creation strategy?
So why invest if the property is running at a loss? Some investors have a taxation strategy and buy negatively geared properties just to get the tax benefits. With this strategy capital growth potential may be overlooked. Others have a wealth creation strategy to build an appreciating asset base over time that will deliver capital growth and a passive income, and the tax refunds are not the reason to invest, just an added benefit along the way.
Positive cashflow and negative gearing ?
It may surprise many investors that a negatively geared property does not always have to cost you money. Buying property that has capital growth potential and a positive cashflow after tax benefits is a great strategy that I have used. With two incomes, one from the tenant and one from the taxman, a positive cashflow outcome is very achievable. Once the penny drops on this concept, it opens up a whole new way of thinking about negative gearing!
Making negative gearing work for you
Negative gearing can work for you to maximise your tax refund , minimise your holding costs and increase your positive cashflow outcomes. If each property you buy pays for itself with the rent and the tax benefits, the worry over ‘negative gearing’ and holding costs can disappear.
Benefits of buying new
For myself I have always invested in new properties. Not only have I attracted good quality tenants willing to pay premium rents to live in that high demand area, but I have maintenance free properties in the early years and one of the main benefits is higher tax refunds boosting my income and giving me a positive cashflow outcome. The secret to achieving this I wrote about in a recent article ‘Have you got the X factor?’. If you register on the Rocket website ‘Contact Us’, I am happy to forward this feature to you.
So rather than thinking positive or negative gearing - think ‘positive cashflow and capital growth’ properties. As an investor you want to get to your goals sooner rather than later. Making the most of the negative gearing benefits can have a number of positives for Australian investors, not the least of which is creating a second income stream from the tax refund and having positive cashflow properties. Negative gearing is a great benefit for investors, but not the reason to invest.
Lindy Lear is a successful property investor who had a late start into investing, yet she built a portfolio of eight properties in just 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, 2012 & 2013 for Property Investment Advisor of the Year. Lindy is passionate about helping others realise their goals through investing in property, and can be contacted on Ph: 1300 850 038 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.