What does negative gearing mean?
It’s part of life for Australian investors and a property buzz word but what does negative gearing mean?
Simply put, when you negatively gear an investment property it means that the amount of rent you receive from the property over the financial year is less than the amount you need to pay on your mortgage to the bank which has been secured by the investment property.
There can be significant tax advantages if you can negatively gear an investment property. The costs of owning that investment property including any interest you pay on your mortgage each year, any property management fees paid to an agent as well as any repairs and maintenance costs are all tax deductible. At the end of the financial year when it’s time to lodge your tax return, all of your outgoings related to your investment property can be offset against your total income (both from the property and any other source of income) to reduce the overall amount which will be payable to the tax man.
Does negative gearing have any risks?
While negative gearing can help increase your gain on borrowed funds, the losses can be large in adverse circumstances.
As a general rule, only investors who have the financial capacity to absorb the effect of potential falls in investment values, as well as an increased cost in interest payments, should consider negative gearing.
You may be able to minimise the risk of negative gearing by:
- choosing your investment property carefully. It may be worth trying to find a property that’s likely to increase in value throughout the investment period.
- having a sufficient income to cover the interest repayments in case your tenants are late with their rental payments, or if your property remains vacant for any time. You also need to be able to pay for ongoing repairs and maintenance.
- taking out mortgage protection insurance with your investment loan, and landlord insurance for the property.
Is negative gearing for you?
Negative gearing is certainly an investment strategy worth considering. However caution should always be taken when purchasing any kind of property and especially if buying when the likely outcome is to be a negative cashflow.
Contact Successful Ways for a free personalised assessment to see how negative gearing could work for you now and in the future.
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