Your Guide to Negative Gearing
As the most popular investment strategy used by Australians, it is important to understand how negative gearing can create wealth.
Gearing is a term that means borrowing money to purchase an investment property. Negative gearing is when that money is used to purchase a property that generates less money than the cost of owning and managing the property. This effectively means that your investment is running at a loss.
The advantages of negative gearing come in the form of tax benefits, which allow you to see a profit when the property is sold off. In this regard, negative gearing looks beyond short-term losses in favour of a long-term strategy.
Negative and Positive Gearing
With lower interest rates and high population growth in urban areas, negative gearing is generally better suited to regional centres and outer urban growth corridors. Infrastructure and communities are evolving in these areas, leading to a likely increase in value over the decades.
Positive gearing is a strategy used by highly involved investors who are less risk-averse. These investors are prepared to spend time regularly studying the market, interest rates, demographics and even politics in order to determine the peaks (when to sell) and the troughs (when to buy).
Positive and Negative Gearing at a Glance
Before deciding to invest in property, it’s important to assess your goals and consider your strategies.
|Negative Gearing||Positive Gearing|
|Term||Long term investment that builds over time||Short term gains in the form of rental returns that are higher than the repayments|
|Returns||No income during the course of the investment, profit is only realised when the property is sold||Higher income than repayments, so the benefit is felt immediately|
|Taxes||Offset losses against primary income to save paying taxes||Additional income may put you in a higher tax bracket|
|Pitfalls||Downturn in property value means that the initial investment may not meet your goals||Require a great deal of work on the part of the investor to recognise and capitalise on upticks in the market and avoid succumbing to downturns|
|Benefits||Low interest rates
Greater long-term return
Potential to develop over time
|Additional income will make it easier to build a portfolio of property more quickly|
Negative Gearing as Part of Your Investment Strategy
With many properties pre-approved by the Foreign Investment Review Board, the competition for property is fierce, indicating higher than average returns over time.
By taking a long-term view of property investment, you can work towards growing your wealth without having to focus as much on the market. Positive gearing, on the other hand, requires you to focus on every upturn in property values, which may require you to sell in order to maximise your return.
Negative gearing will build capital in the long term whereas positive gearing requires a vigilance that is suited more to an investor with passion and a need for a few thrills.
Get the Best Advice
With a wealth of experience in Gold Coast real estate investment, Astute Investments can advise you on the investments and strategies that will help you reach your financial goals. Contact us for qualified and professional advice that has been used by investors all over Australia to build profitable property investment portfolios.