Negatively Geared Investment Property - Don’t be Fooled by Tax Savings! Understand the Big Picture.
Let me start with an often missed truth. If you have a negatively geared property it means you are losing money and there needs to be some redeeming aspects of your investment (usually price growth) that compensates you for this loss. It means the rent you are receiving is not enough to cover the property expenses. (Interest on the loan, insurances, rates, repairs, agents fees, etc) You are forced to prop up your investment from your hard earned wages.
If you have a Negatively Geared Property, does that mean your Investment is a Dud?
One good thing about negative gearing is the Government is helping you cover your loss by reducing your tax bill. But don’t kid yourself – you are still losing money!!
So why do many Investors like Negative Gearing?
When we buy property we cross our fingers and hope that property prices and rents continue to go up. Let’s say you are currently forced to put in $5000 of your wages each year in to “prop up” your investment property. You would be sitting back and hoping like crazy the value of the property increases by at least $5000. (This figure will vary depending on your individual tax rate and other factors)
Hopefully the rent also increases as time goes by. So maybe if you lost $5000 this year, you would only lose $4000 the following year.
If all goes well, in a few years you will have reached the really sweet spot where your rents have increased to the point where all the property expenses are covered with some leftovers for you. Congratulations! You are now positively geared. Although the Government will no longer help you with your tax bill, (in fact they may even start taxing you a little extra) this is good news. Because now you don’t have to worry so much about property prices increasing as you are no longer losing money each year. The property is paying for itself.
General rule of thumb – when buying investment property always focus on property that will give you (1) good capital gain and (2) good rental return. If you buy a property that meets these criteria then using Negative Gearing is quite OK. I strongly suggest getting the property valued once a year. Then conduct an annual review with your accountant or financial adviser. If your negatively geared investment property is not giving you an overall positive return, consider selling it.
Please note anyone considering an investment property needs to seek the advice of a qualified tax accountant or Financial Planner before proceeding with a purchase as individual circumstances vary.