Negative gearing has become a popular method for purchasing investment properties. It can help investors build their portfolio and create strong personal cash flow over time.
It’s important to understand “gearing” simply means borrowing to invest. It gives investors the power to purchase properties without needing the full purchase price in cash.
However, in the early stages of borrowing to invest, repayments and fees are usually more than the income you will receive from the tenanted property and this creates negative cash flow. This is referred to as negative gearing. It may feel risky investing in a property where you are losing money, but there are benefits.
An example of a short term benefit is the tax benefit. Investors who are losing money on their investment are able to offset this loss against other income which results in reducing their overall taxable income. This tax benefit is a small incentive and investors need to realise it is because they’re making a loss. Ideally they will want to have a positively geared investment.
Negative gearing gives investors the opportunity to get a head start and buy properties using their debt. After a few years, your investment will hopefully become a positive geared property, which means your returns are higher than the costs. Once this happens, you could start looking into purchasing another negative geared property and the cycle will continue from there.
According to the Australian Taxation Office, the 2009/2010 taxation report stated that 72.8% of people who had investment properties, just had one. This means there are plenty of people out there who have started investing and have the potential to create a portfolio.
Negative gearing provides a great opportunity for investors, but just like with any other loan or investment, a plan is vital in order to come out on top.