We handle a lot of investment property in Perth. In the office, we pretty much live and breathe everything that has anything to do with investment property. From time to time, the concept of negative gearing becomes popular among investors.
We have never believed in negative gearing–except on a very short-term basis– and believe that now is a time when it is mandatory to derive income from all investment properties as quickly as possible.
What is Negative Gearing?
Negative gearing is, when all of the rhetoric is stripped away, taking a loss on a property. Basically, the amount of money coming in doesn’t pay the interest on the loan. In other words, you have to take money from other places to subsidise the investment.
What are the “Benefits?”
The Australian Government allows us to deduct the losses against our income, causing many to rejoice and trumpet negative gearing as a sound investment strategy. In reality, we think nothing could be farther from the truth.
For numerical purposes, let’s say you are in the 30% tax bracket. That means that for every dollar you lose, you will receive back 30 cents. That’s really great– and we love paying less taxes–but you are still losing the other 70 cents.
When you could count on property to appreciate fairly quickly and rents to rise, it was possible to sustain losses on a property indefinitely and have them offset by capital gains. In the current economy, we can’t count on short-term gains. A slow property market can give you a net loss on a property over a period of years.
In addition, interest rates are at their all-time low right now. If you can’t at least break even now, you are going to have a greater problem when interest rates go back up.
Negative gearing was never meant to be a long-term strategy and it doesn’t work in the short-term very well, either. While it can’t always be avoided, we have come up with some guidelines so your investing is focused on making money and not negative gearing.
These guidelines are the result of years of experience, hard work and learning from our mistakes. While they can’t replace professional advice for your particular situation, they make a great place to start.
Buy the Right Property in the Right Place at the Right Time
While a lot of money can be made through long-term capital gains, the cornerstone of the process is making sure that you purchase the right property. Location can make the difference between a property barely outperforming inflation and a property turning a huge profit. Always buy properties in areas that show the most potential for sustained prosperity.
Always Add Value to Any Property
The key to maximising your profits on an investment property is to find ways to increase its value. Improvements usually show a huge ROI over a 30-year loan, and any property that can be subdivided is a potential gold mine. Development and renovation can help boost your property’s value, too.
Positive Gearing is a Must
In rare cases, you may have to sustain as much as a year or two of losses on a property but they should be as low as possible. We recommend, in all but the most extreme of cases, gearing your properties for positive cash flow as soon as possible.
Jarrod Mahon is the Director of Property Management, Sales, and Strategy for Investors Edge Real Estate in Perth. For a personalised property success plan, call 1300 472 427 or visit their website: https://www.investorsedge.com.au/.