Property Investment with Negative Gearing
Property investment with negative gearing involves discipline, longevity and an understanding of risks.
Thinking about buying an investment and using your mortgage as the gearing tool to fund an investment?
There are pros and cons to the method of negative gearing. When the market is good the returns are good, yet a low or sudden fall in the market can have long lasting financial losses. Let’s have a look at the positives and negatives of this investment strategy.
What are the positives of property investment and negative gearing?
- The loss associated with income generated from the property compared to the cost of holding the investment, can be used to reduce tax payable on an investor’s salary
- Those investors on a high marginal tax rate are likely to benefit more than those on lower ones
- Negative gearing uses tax to subsidise your investment
What are the negatives of property investment and negative gearing?
- Losses associated with an empty investment property
- Sudden downturn in the market and the property fails to increase in value not covering the loan balance when the investment is sold
- Rise in interest rates that cannot be passed on to the tenant, furthering the investment loss and affecting your ability to repay the loan
- Tenants may default on paying rent
- Losing income/salary due to ill health as all negative gearing is subsidised by your income
- Poor investment choices could lead to your own home being at risk
8 Ways on how to reduce the risk of negative gearing
- Ensure you have a secure income that can cover the loan repayments when the investment cannot
- Having a high marginal tax rate to get the most effective tax benefits
- Being aware that negative gearing involves commitment for a period of 5 to 10 years
- Having adequate funds set aside should tenants default on payments
- Ensuring you’re prepared to handle financial changes such as reduction in income, loss of spouses income or increasing family commitments
- Consider purchasing an investment with a central location, close to all major conveniences which would have a higher appeal rate to potential tenants
- Prepare for the worst. Make sure you have adequate insurance for both the investment and you personally
- Equally important is to have diversified investments. In other words, make sure all your eggs aren’t in one basket so that if one investment fails it does not take down the rest
Negative gearing should be taken very seriously before any decision is made. Consult a professional who step by step will go through the risks, plan how to minimise the risk and forecast the unforseen before you invest.
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