One of the most common questions I am asked is, "should I negatively gear into an investment property?"
Like many questions, the answer is, "It depends."
So rather than preparing an article that is of no use to anybody, I thought I would prepare a few articles that will hopefully share some constructive insights that can help answer what it depends on...
The first common misconception is that of negative gearing. The correct terminology is "Gearing."
|Types of Gearing
Let's identify the common expenses:
- Interest on the loan – note principle loan repayments are not deductible,
- Ongoing property repairs & maintenance (not improvements),
- Body Corp fees,
- Agent management fees,
- Utility expenses: Service charges on gas, electricity, water,
- Rates, and
- Insurance – Building & Landlord's Insurance (ie to cover loss of rent or tenant damage).
So why gear?
Most people consider gearing primarily to help reduce their tax with a secondary thought to it assisting in growing their wealth. Some build a portfolio of properties whist others are happy to just own one. A number of people dip their toe in the water and find it not to their liking and sell within a few years.
Gearing is best thought of as borrowing money to invest – generally from a bank. Using the bank's money to help buy an asset you couldn't otherwise afford to fully pay for yourself is a pretty common strategy - we all buy our homes this way, so why not an investment? The attractiveness is even greater if the property value increases significantly – your gain is magnified (however losses are also magnified), and generally being able to claim a tax deduction for the interest paid on the loan.
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NOTE: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.