What is Negative Gearing?

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What is Negative Gearing?

Negative gearing refers to the condition wherein the net rental income for an investment property is lower than the interest on the property loan after deducting the operational expenses. This means that the property rental is operating at a loss.

For example, after getting a property investment loan from a bank, you paid for the renovation of the property including the maintenance cost. At the end of the year, you have discovered that the annual net income you have received from the property is lower than the costs incurred when you have purchased the investment and operate it as a rental business.

Although negative gearing may seem a bad strategy, property investors can take advantage of the loss when they offset it against the profit they earn from other sources. The outcome of this is that your net income for the year is lower, so your taxes are also lower. Negative gearing is considered as a long-term strategy, because investors can benefit from possible increases in property value in the future.

How to Take Advantage of Negative Gearing

As an investment strategy, you can turn negative gearing into a positive profit in the long term. Take note that the primary objective of any investment is to make a profit. However, not all businesses can always enjoy positive net income at the end of the year. In the property rental industry, there are seasons when rental market is low and there are also unforeseen expenses in maintaining a rental property.

Negative gearing may result to negative profits, but still you can use this for your advantage especially for lowering your tax payables. You can use your negative net profit to offset the income you receive such as from your salary or from your other businesses. To put it simply, you can take use the taxation system for your advantage to shoulder the brunt of the effect of your investment loss for the short term, and still your property may enjoy capital gains if its value rises in the future.

Is negative gearing a good property investment strategy?

It depends. If you are careful in choosing the investments that have high potential for capital growth, then negative gearing can be an ideal investment strategy in building your portfolio. Thousands of Australian investors are using negative gearing to achieve their investment goals.

Moreover, there are several factors to consider to determine if negative gearing is the right property investment strategy for you

First, to make certain that negative gearing is the strategy you should follow, you must have a comprehensive knowledge on how it works, the tax benefits you can take advantage, and the possible capital gain for your chosen property.

In general, negative gearing is ideal for property investors who have multiple sources of income and have the financial capacity to operate at a loss and to withstand a possible fall in the value of the rental property.

You must have enough financial resources to ensure that you can pay the mortgage or if you experience long vacancy periods. Your sources of income must be stable and you should have enough cash flow to effectively manage some unexpected circumstances.

If you think negative gearing is the right strategy for your property investment, then the next step is to discuss it with your financial adviser.

For your inquiries on property investment loans and other related concerns, you can call Express Mortgage Market on 1300 663 997.



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Darren Moffatt

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