How Does Negative Gearing Work?

One of the biggest hurdles in purchasing the first investment property is getting your head around the fact it may be "losing" money every week. What is called negative gearing is the fact the cash flow of the property is negative-Its holding costs are more than the rental income. This may be the first and biggest stopping point for many.



However it’s simply the nothing more than the cost of doing business short term. If your $300,000 property was to double in value in ten years (assuming the traditional cycle time), would you look back and stress about the $5000 in the first year, $4000 in the second year it may have cost you initially? I’m in no way saying that it is insignificant because it is very when it comes straight out of your wages or income!!



If you worked out how much per week your investment property grew in value per week by doubling every ten years I’m sure it would far out way the short term negative gearing.

There is really only one benefit to negative gearing-Tax deductions.



An income-producing asset (rented investment property) that has negative cash flow is allowed tax deductions that can be passed on to your personal tax return.



Example



$300k Property



Expenses (p/a)



Loan Interest = $21,000



Rates =$2,100



Management=$1,165



Insurance =$600



Maintenance =$500



Accounting =$400



Total =$25,765



Income



Rent =$17,160



Shortfall =$8,605 =$165 per week



Property Doubles in ten years =$576 per week



(600k – 300k = 300k / ten years/52 weeks)



So by thinking short term is not really that beneficial in term s of building up a sizable portfolio. Managing your cash flow from day one when its negatively geared can only teach you good habits on how to budget well and will set you in good stead for in time when the rent does double and the cash flow is in fact positive! You are only buying time in the market to hold your hopefully appreciating asset.



Still doesn’t seem like you can afford it? Just think- What else do I spend my money on that goes up in time with being able to borrow with such great leverage like investment property?



Credit cards? Holidays? Cars? Clothes?

About The Author

www.Investment-Mortgages.com.au operates in Queensland Australia and helps local and international investors and home owners get the right advice and best loans. They also provide insurance and risk protection to ensure your strategy is water tight!