Okay. So, you know how we love to unpack these financial concepts that sound way more intimidating than they actually are, right? Like deciphering a secret code.
Exactly. And today’s code word is negative gearing.
Sounds a bit ominous, doesn’t it?
It does. Like, who wants anything negative associated with their money? But I promise you, this is one of those times where negative doesn’t necessarily mean bad. In fact, it can potentially lead to some positive gains. When it comes to property investment, definitely one of those: Don’t judge a book by its cover situations.
100%.
Yeah.
So, let’s decode this for our listeners. What exactly is negative gearing? Imagine you’re explaining it to someone who’s completely new to the game.
Okay. So, picture this. You buy an investment property. Maybe it’s a cool apartment or a townhouse, whatever you’re into. But the thing is, owning this property costs more than the rental income it generates each year.
So, let me get this straight. You’re spending more on the property than you’re actually making from it. Essentially, yes, you’re in the red, at least on paper.
Okay. And that’s a good thing.
That’s where it gets interesting because in Australia, that loss, you’re making that difference between your expenses and your rental income. It’s where the magic happens.
Hold on. Are you saying that loss can actually work in your favor?
You got it. That’s the beauty of negative gearing. You can actually use that loss to reduce your overall taxable income, which means a smaller tax bill.
Okay, now we’re talking.
So, it’s like getting a little bonus from the tax man just for owning an investment property, even if it’s not making a profit yet.
Think of it as the government subsidizing a portion of your investment through tax deductions.
I’m liking the sound of this. But I bet our listeners are probably thinking, “Hold up, I’m still losing money up front, right? So why go through all this just for a tax break?”
Because negative gearing is not just about the here and now. It’s about the bigger picture. Using those tax benefits as a springboard to potentially greater gains down the line. It’s all about strategically positioning yourself for something we call capital growth.
Okay, so let’s break down this capital growth thing. What exactly does that mean in the context of property investment?
In simple terms, you’re banking on the value of your property increasing over time.
So it’s like placing a calculated bet that the property you buy today will be worth significantly more in say 5 10 20 years.
“Get your Access to our Fully Customisable Investment Property Research and Analytics Tool Now!”
Precisely. You’re accepting those initial losses with the expectation that they’ll be more than offset by the property’s appreciation in value over time. So, we’re playing the long game here. It’s a strategy for building wealth over the long haul, not a get-rich-quick scheme.
Exactly. It’s about leveraging those tax benefits now while investing in an asset that you hope will appreciate significantly over time.
Okay, that makes sense. So, we’ve covered the what and the why of negative gearing, but I know what everyone’s probably thinking now. What about the risks? Because it can’t all be smooth sailing, right? What are some things people need to be aware of before even thinking about dipping their toes into the negative gearing waters.
Right. Because every investment strategy comes with some element of risk and negative gearing is no exception. It’s like that saying, no risk, no reward. Exactly. And in the case of negative gearing, one of the biggest risks is something we actually touched on earlier. Vacancy.
The dreaded vacancy. Yeah.
The silent killer of cash flow.
It can really throw a wrench in the works. Remember that $20,000 rental income we used in our example? Well, that’s assuming you have a tenant in there. consistently paying their rent on time. But in the real world, that doesn’t always happen.
And the thing is, even if your property is sitting there vacant, those mortgage repayments don’t just magically disappear.
Exactly. Those expenses, mortgage repayments, council rates, maybe even body corporate fees if you’re dealing with an apartment. They keep on coming regardless of whether or not you have a tenant.
So, it’s like that sinking feeling when you realize you’re still paying for that gym membership you haven’t used in months, but on a much larger scale.
That’s a good way to put it, which is why it’s so important to have a buffer, a financial safety net, so to speak.
Exactly. Yeah.
Before you even think about negative gearing, you need to ask yourself, can I comfortably cover those mortgage repayments and other expenses for a few months if my property is vacant? Do I have an emergency fund specifically for this? Because you don’t want to be caught off guard if things don’t go exactly according to plan.
And speaking of things not going according to plan, let’s talk about the property market itself. We can’t just assume those property values are going to magically go up forever. Can we?
Definitely not. Property markets are cyclical, which means they go up, they go down, and unfortunately, there’s no crystal ball that tells you exactly when those shifts will happen.
It’s all about managing those risks.
Check out “How to Control Emotions when Buying an Investment Property?“
Precisely. Because if you buy at the peak of the market and prices drop, you might find yourself in a situation where not only are you covering that rental shortfall, but you’re also considered underwater on your mortgage, meaning you owe more on the property than it’s currently worth. Not a good feeling. So, it’s a timely reminder that negative gearing is not a guaranteed path to riches. It comes with its fair share of risks.
Absolutely. And it’s not just market forces or vacancies you need to consider. Remember those interest rates we factored into our calculations? Those can fluctuate, too.
Oh, right. And we’ve seen some pretty dramatic swings in interest rates recently.
Exactly. And if interest rates rise, your mortgage repayments could increase significantly, which puts extra pressure on your cash flow.
So, it’s like trying to balance on a seesaw. that keeps tilting back and forth. You’ve got to be prepared for anything.
Exactly. It all comes back to stress testing your finances. When you’re running those numbers, don’t just look at the current situation. Ask yourself, what if interest rates go up by 1%, 2%, even 5%. Can I still comfortably cover those increased mortgage payments?
So, it’s all about having those what if scenarios planned out.
Absolutely. And speaking of what ifs, we can’t forget about the tax man, can we?
Oh, right. Because tax laws aren’t exactly set in stone, are they? What’s considered an advantage today might not be tomorrow.
Exactly. Governments can change tax policies, and sometimes those changes can significantly impact your investment strategy. That’s why it’s so important to stay informed, keep your finger on the pulse of any potential changes that might affect your investments,
right? Because what seems like a surefire strategy today might not be so clear-cut a few years down the line. It’s like that saying, the only constant is change.
That’s very true. And it’s one of the reasons why having a Good team in your corner can be so valuable. A financial adviser who understands the ins and outs of property investment. A savvy accountant who can help you make the most of those tax deductions because when it comes to navigating the complexities of negative gearing, knowledge is power.
100%. And having the right experts on your side can make all the difference.
Okay. So, we’ve talked about the potential pitfalls, but I want to circle back to that glimmer of hope we discussed earlier because even with those risks, there’s still that enticing possibility that negative gearing can lead to a positive outcome. Right.
Absolutely. It’s not all doom and gloom. In fact, when done right, negative gearing can be a fantastic way to build long-term wealth.
So, tell us more about that transition. How does a negatively geared property actually become a source of positive cash flow over time? How to go from negative to positive in the world of gearing? So, how does that work? How do you go from being in the red to actually making a profit with negative gearing?
Think of it like planting a seed. You nurture it, give it time, and eventually it grows into something much bigger.
“Get your Access to our Fully Customisable Investment Property Research and Analytics Tool Now!”
Okay, I like that analogy. So, what are the key ingredients that help that little seed sprout into a profitable property?
Well, one thing that usually happens over time is that rents go up. So, that $20,000 rental income we talked about, that could easily become 22,000, 25,000, even more as the years go by, right? So, your rental income is increasing. And at the same time, what about the mortgage? Does that play a role?
Absolutely. Every time you make a mortgage repayment, you’re chipping away at the principal, the amount you actually owe. And as that principal goes down, your interest payments usually go down too, which is great because those interest payments are a big chunk of the expenses you can deduct when you’re negatively gearing.
Exactly. So, it’s like a double whammy. Your income is potentially going up and your expenses are gradually going down.
Okay. I see how that gradually shifts things in a positive direction.
And then there’s the real game changer, that capital growth we talked about. If you’ve chosen your property wisely, and the value goes up over time. That’s where things get really exciting because you could reach a point where that rental income isn’t just covering your expenses, it’s actually putting money in your pocket.
Exactly. On top of any increase in the property’s value.
It’s like that moment when your little seedling finally bears fruit and you’re reaping the rewards of those years of careful planning and let’s face it, a bit of patience.
Exactly. And that, my friend, is the ultimate goal of negative gearing.
I have to admit, It’s a pretty sweet deal when it all comes together. But I want to rewind for a second. You mentioned choosing your property wisely. What are some of the things people should be looking at when they’re trying to identify those properties with strong capital growth potential?
Well, it all comes down to research, doesn’t it? You need to be really strategic about your choices.
So, where do you even begin?
This is where a tool like SuburbsFinder can be a game changer. Remember, we talked about them earlier.
Yeah. They’re all about data-driven decisions when it comes to property. Right.
Exactly. They take the guesswork out of it. They provide all this amazing research and analysis on different suburbs so you can see which areas have that historical track record of growth, which ones are attracting more residents, all those factors that can influence property values.
So, it’s like having a secret weapon in your back pocket.
That’s a great way to put it. And they also provide data on things like rental yields and vacancy rates, which is crucial for understanding the potential income and the level of demand in a particular area.
So, it’s all about being informed. making those decisions based on real data, not just gut feeling.
100%.
Yeah.
And even when you found that perfect property in a promising location, remember those tax deductions we talked about, making the most of those is still absolutely crucial.
Check out “How to make use of Supply and Demand Indicators when it comes to investing property?“
Absolutely. Speaking of which, before we wrap up, let’s quickly recap those key deductions people should be aware of.
Sure. Obviously, the interest you pay on your mortgage is a big one, but you can also deduct things like council rates, property management fees, repairs, and maintenance. Even the depreciation of your property over time.
So you can actually get a tax break for the wear and tear on your property.
Exactly. It’s called depreciation. And it’s one of those hidden bonuses of property investment.
I love those hidden bonuses. This has been a fascinating deep dive. I feel like we’ve demystified this whole negative gearing thing and actually made it feel achievable.
It’s all about knowledge and planning and of course having the right team in your corner to guide you through the process.
Couldn’t agree more. So To everyone listening, thanks for joining us on this deep dive. We hope you’ve learned a thing or two and feel empowered to make those smart investment decisions. Until next time, happy investing everyone.
