This week we are delving into a question that’s frequently asked in the world of property investment: “Should an investor avoid negative gearing?” It’s a topic that’s sure to spark a lot of interest and debate. I’ve got some insights to share, so let’s jump right in!
Understanding Negative Gearing
To start off, let’s clear the air on what negative gearing means. For those who might be new to the world of property investment, the term might sound daunting.
Essentially, negative gearing occurs when the expenses associated with owning a property, such as mortgage interest, maintenance costs, and property management fees, exceed the rental income it generates.
In other words, you’re putting more money into the property than you’re getting out of it.
Numbers Matter
When it comes to negative gearing, understanding the numbers is paramount. Throughout my years of experience, I’ve had properties that required an average additional investment of $50 per week.
While this might seem like a financial burden, I’ve always seen it as a form of mandatory savings.
As long as the property’s value continues to appreciate, there’s the anticipation that rental income will eventually surpass these costs. But remember, knowing these figures inside out is crucial.
Individual Circumstances
It’s important to note that negative gearing isn’t a one-size-fits-all scenario. Your financial situation plays a significant role in determining whether it’s a viable strategy for you.
If your weekly cash flow is already tight, diving into properties with negative gearing might not be the wisest move. Always consider your individual circumstances before making any decisions.
The Property in Question
The decision to embrace or avoid negative gearing can also hinge on the specific property you’re eyeing.
For instance, if you’re venturing into development projects, where the value lies more in the land itself, negative gearing could be part of the equation.
Each property is unique, and its characteristics will influence whether negative gearing aligns with your investment goals.
Start Smart with Your First Property
For newcomers to the realm of property investment, my recommendation is to start with a property that has the potential to cover its own costs, ideally being neutral or positively geared.
While this might sound challenging, it can significantly reduce financial stress and provide a more stable foundation for your investment journey.
Impact on Borrowing Capacity
Negative gearing can impact your ability to secure future loans. Lenders assess your borrowing capacity by factoring in the rental income from your properties.
If a property is consistently costing you money, your borrowing capacity could be diminished.
So, when discussing your financing options with experts, ensure you’re well-versed in the potential impact of negative gearing.
Tax Considerations
Now, here’s a silver lining for property investors. Just like running a business, property investment comes with tax implications.
Many of the expenses tied to your property can be tax-deductible. One significant deduction to keep in mind is depreciation.
If your property is brand new, you can claim depreciation on fixtures and fittings. This deduction can provide a helpful boost to your cash flow and counteract the effects of negative gearing.
Choose Wisely for Long-Term Success
In the end, the decision to avoid or embrace negative gearing should be based on a comprehensive analysis of the numbers and your financial goals.
Modern, low-maintenance properties often prove to be a wiser choice, offering better outcomes and less financial strain compared to older, high-maintenance counterparts.
Expert Guidance
Remember, if you’re ever unsure about the financial feasibility of a property or need assistance crunching the numbers, don’t hesitate to reach out. I’m here to provide detailed cash flow forecasts that can help you make informed decisions about your investments.
To discuss further book a time in my calendar by clicking here.
Regards,
Geoff Tomkins
Buyers Advocate
PH: 0404 852 781
