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If you have purchased investment properties in Perth or around Australia, you have probably heard of the term negative gearing.
Blogger: Jarrad Mahon, Investors Edge Real Estate
Negative gearing is loosely defined as buying an asset on borrowed money but not monetising that asset sufficiently to generate enough money to pay the interest on the loan. In other words, the interest on the loan is more than the income produced by the asset.
In Australia, any losses caused by negative gearing can be reported as losses against income - and we can deduct for it. While the simple words 'tax deduction' are usually enough to perk anyone's ears up, negative gearing isn't nearly as attractive as it sounds.
The maths is simple: If you are being taxed at 30 per cent, you are basically going to get back 30 cents on the dollar for the money you lose on your investment property. A dollar minus 30 cents works out to 70 cents; that 70 cents is exactly what you still lose on every dollar.
When investing in a negative geared property you are completely relying on capital growth to offset your losses.
In times of rampant and guaranteed capital growth, negative gearing was effective as a stopgap solution for someone who could afford to sit on property and wait for it to produce more money. In addition, a negatively-geared property was tolerable as part of a portfolio with a net profit.
In this era, though, you can't count on capital growth and you can't count on low interest rates. Both the property and lending markets are just too volatile - and mistakes can be costly. If interest goes up and rents go down while you are holding a negatively geared property, it is going to put a serious dent in your budget.
We have come up with a set of guidelines so that your property investment is focussed on making money and not just negative gearing because you want a tax break. Over the past five years since the global financial crisis, we have helped hundreds of clients dig out of negative cash flow situations and in invest smarter using these guidelines.
Remember, every client is different and every situation is different. This post is in no way a substitute for getting advice specifically tailored to your situation, but it makes for a great foundation when investing in properties around Australia.
Buy Your Properties Well
There is an old saying in real estate: 'Make your money when you buy.' This is still true today. You can definitely make money after you purchase a property, but buying wisely is the cornerstone of monetising your property investment.
The most obvious strategy here is 'buy low and sell high,' but a savvy property investor goes far beyond that old adage. While finding a property lower than market value is always great, you can overpay for a property and still produce plenty of profit if you have a sound strategy for improving the property.
The most important factor is location. Find an area that has the best potential for growth. If you can combine knowledge of the local market with some of the more advanced tools for predicting prices, you can significantly increase the likelihood of both short-term and long-term growth.
Add Value to Your Properties
While long-term investors can usually profit by simply buying properties, keeping them in shape and renting them out until retirement, there are a lot of ways to maximise returns and make a lot more money. For example, subdivision, building, renovation and development are all strategies that produce significantly more revenue from your properties. These strategies can even be implemented passively if you surround yourself with the right people.
Plan for Positive Gearing
You shouldn't ever have a property that doesn't at least break even in two years. A small amount of negative gearing is OK if it is absolutely necessary, but you must take steps to ensure that your property is producing revenue for the short term as well as the long term.
Software like PIA (Property Investment Analysis), can project revenue for a property before and after taxes. Remember to include any money that you will need for improving the property in your projections and allow for an emergency fund.
Consult a Professional
Call 1300 472 427 and ask a real estate agent in our office for a property success plan.
About Jarrad Mahon
Jarrad thrives on helping hundreds of investors every year formulate a clear plan to get the best returns from their Perth property. This requires a carefully thought out and innovative approach to understand your situation and help you to make the right move at the right time.
His renowned personalised "Property Success Plan" takes you step by step through how to make thousands of extra dollars and avoid the costly mistakes that Jarrad has learnt the hard way by investing himself all around Australia.
Over the last five years he has used his engineering background to build and refine a unique property management, sales & investing process that is sure to impress while getting you real results.
A sales and marketing expert, Jarrad combines the latest technology and cutting edge sales strategies to sell homes across the whole of Perth metro area.
Negative gearing occurs when the rental income of a property is not enough to cover the total costs of managing the rental and re-paying the interest portion of the loan.