The Benefits and Downsides of Negative Gearing

One of the biggest hurdles in purchasing the first investment property is getting an investment home loan and 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 significant when it comes straight out of your wages or income!!

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)

Conclusion

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.

Finance Me helps Investors with mortgages no matter their credit rating.