Negative gearing is likely to be the most
popular investment strategies in Australia, negative gearing is when you go ahead and
purchase a property that costs you money on an ongoing basis, this is a property whether
rental income does not cover expenses like your mortgage insurance management and so
forth. What this means is that every single week
or every single month or every single year you have to pay money out of your own pocket
towards this property because it is not paying for itself.
What are the pros and the cons of negative gearing and why do so many investors opt to
negatively gear their properties when investing in Australia.
Hi, I’m Ryan Mclean from positive cash flow Australia and I help people like yourself
find and invest in positive cash flow properties all over Australia. Let’s have a look at the
pros and cons of negative gearing so you can be able to assess whether or not this is an
investment strategy that you want to consider. Let’s start by looking at the pros because
it’s always nice to look at the good stuff first.
I’ve got five different pros and benefits of negative gearing and then we are going
to look at three of the cons of negative gearing as well.
Pro no one is high capital growth, because the majority of properties in Australia are
going to be negatively geared, by opting for negative gearing you are giving yourself more
options of which properties you want to choose, this means that you could if you are a great
investor and you know your market well, secure property in high capital growth areas, now
positive cash flow property can also achieve capital growth, but is much harder to find
positive cash flow properties and therefore you are going to be limited in which properties
you can invest in. If you are investing in negatively geared
properties you can invest in any property in Australia you can take your pick by gaining
those capital growths, the idea is you make more money in capital growth and then you
are spending through the loses of your property. Benefit number two is high depreciation, again
because you’ve got that large scope of different properties you can invest in, you could look
for properties that have high depreciation, that may be a new build property that has
just been build and you can then depreciate the building and you can depreciate all the
new internal fixtures and fittings and carpets and everything like that, with this high level
of depreciation that gives you a tax break and you can claim that against your income
and effectively you can get a tax refund from that depreciation.
I do suggest getting a quantity surveyor to do a professional assessment of your property
and checking with your accountant what you can and can’t claim, I do have another video
podcast an article on depreciation which you can check out over at the blog.
Benefit number three pro number three is tax savings from negative gearing, for every dollar
that you lose in an investment property you can effectively claim that against the money
that you are earning from your job, obviously when claiming anything to do with tax see
a professional this is for educational purposes only.
If you are losing money again through depreciation or through a loss in cash flow that you have
to pay out you can claim some of that money back by claiming it as a loss and getting
a tax refund for it, they can be great tax benefits to investing in negatively geared
property and that is one of the reason why is so appealing to so many Australians.
Benefit number four is the opportunity for development, again if you are looking at positive
cash flow properties they are harder to find and till you are going to be limited in the
area and the places that you can purchase investment property, however with negative
gearing properties is more likely you can look at development and converting maybe one
property into multiple properties or converting land into a development asset, while using
this development by creating more properties you can get a better rate of return through
negative gearing in some circumstances than you would have by simply purchasing a negatively
geared property letting it sit there and do nothing.
Benefit number five which is the last one I could think of which is you have more ability
to purchase in those safe and secure areas, this might be a capital city, it might be
a beach side suburb it might be somewhere that you know is a great and safe city where
people will always want to live, because you’re negatively gearing you have more choice and
you can choose to purchase in this safer neighborhoods that are likely to be more secure for investments
for you. Negative gearing isn’t all let’s do a happy
dance on the rain, it’s not great all the time I have seeing many people lose a lot
of money through negative gearing when their property gone up in value of whether there
property have gone down in value, they are some cons in negative gearing that you need
to consider before you go ahead and invest. Number one is cash flow, negative geared properties
are going to suck your cash flow, if you don’t have a lot of money to spare, or you want
to actually create an influx of money in a stream of passive income, then negative gearing
probably isn’t going to be the best investment strategy for you, with negative gearing you
need to pay money out of your own pocket every single month in order to keep that property
running otherwise you won’t be able to pay your debts, you won’t pay your bills and your
eventually lose the property. Cash flow can be an issue with negatively geared properties.
Con number two is capital gains, even though I said that a benefit of negative geared property
is capital gains, a negative of negatively geared property is also capital gains and
the reason I say this is because you become so reliant on capital gains and so reliant
on market fluctuations that if the markets is stable, if the market is going down then
you are not making any money. The great thing about positive cash flow property
is that even when the market is stable even when property prices go down, you can still
make money each and every month because you got that cash flow coming in, the one of the
negatives of negatively geared property is that you are reliant on capital gains and
if you don’t get it your property will eventually not deliver you any arrow at all.
Con number three is service ability, because you are dishing money out of your pocket every
single month in order to pay for this property it does limit how many properties you can
buy and still afford to live, if you own a million dollars a year then maybe you can
afford to purchase quite a few properties, if you are on 100,000 or 70,000 or 50,000
or $40,000 per year then been able to afford even $100 per month, per property is going
to severely limit how many properties you can afford to buy, because this lack of service
ability it means that you can’t develop a large investment portfolio and you may limit
that your returns are going to get across your portfolio because you are limited to
just one investment property. There you have the pros and cons of negative
gearing in Australia, I hope that this has help you consider whether or not negative
gearing is going to be a great investment strategy for you and help you to understand
they are benefits to negative gearing but there are also risks associated with it as
well. If you want more videos, podcasts or articles
just like this one please head over to poitivecashflowaustralia.com.au and check all that we have to offer.