Negative gearing is a very common investment strategy which many investors choose to go down. With the majority of properties in Australia negatively geared, it’s very easy to come across a negatively geared property, compared to a positively geared property which tends to be situated in more rural parts of Australia.
Negative gearing is when the income generated from your rental property does not cover the expenses so you need to make up the shortfall from your own pocket. You can then claim this loss in your annual tax return. This can be a manageable amount such as only a few dollars a week, or in other situations this can be much more. This can be far riskier and put you at greater financial risk if you cannot meet these repayments each month.
It is important to keep in mind that negative gearing should be a paper expense rather than a pocket expense. You shouldn’t physically have to be forking out money from your own pocket to cover the shortfall. This expense can be claimed through your tax return instead either at the end of the financial year or you can adjust your pay through an Income Tax Withholding Variation from the ATO. At the end of the day your property should be producing a positive cash flow and should not be negatively geared forever.
So, why should you buy a negatively geared property over a positively geared one? Here are our 5 top benefits you should consider first.
1. Major tax benefits
One of the main reasons property investors buy a negatively geared property in the first place is for the tax benefits and to reduce their taxable income, especially for anyone on a high salary. As your investment property is generating a loss, you can offset this loss against your income in order to reduce your taxable income each year. If you have bought the property jointly, it’s worth putting the property in the name of whoever has the highest salary to reap in the greatest rewards.
2. Greater stability
Positive cash flow properties are generally found in regional areas such as mining towns which only rely on one economy. When this economy fails then properties are put at higher risk. People tend to move away and it will become difficult to rent your property out with higher vacancy rates and increased unemployment to contend with.
Negatively geared properties therefore provide greater stability as they are usually found in areas close to core amenities such as schools, shops, transport and hospitals and there is more than one economy to rely upon. It’s best to do your research first to ensure your property is well positioned with employment options and major transport routes close by.
3. Easier to find
With the majority of properties in Australia negatively geared, this makes them far easier to find. Negatively geared properties tend to be situated within inner city areas, with transport, amenities and schools all close by.
4. Good capital growth
When compared to a positively geared property, a negatively geared property tends to grow much faster and produce higher rates of return. This is mainly due to its location and rental tenants and potential buyers more attracted to rent or buy here. If you buy your property in the right location at the right time, you could reap in the rewards of high capital growth returns which you can use towards your next investment property, rather than having to save up another deposit which could take years.
5. Affordable for rental tenants
A negatively geared property tends to be more affordable for tenants as the rents are usually lower. This helps you secure a rental tenant for the long term, rather than having to constantly advertise for new tenants.
When buying a negatively geared property, it’s important to look at the overall factors and not just how much tax you could save. Be sure the property is well located close to key amenities which will help attract tenants and buyers in the future. Try to buy within a high demand, low supply suburb which will make it easier to rent the property out with less competition to go up against. You should also take in the future and investigate whether there will be many more developments happening in the local or neighbouring areas which could have a positive or adverse effect. A new train station could be a positive, but 10 new large apartment developments could make it much harder to rent your property out.
To find out more about buying a negatively geared property and how much this could cost you, why not get in touch with the friendly iBuyNew team and speak to one of our Property Consultants today.
Give us a call on 1300 123 463 to learn more about negative gearing and reduce your taxable income today.