A positive or negative geared property is something that investors factor into their strategy and buying decision, but as Smart Property Investment editor Phil Tarrant explains, focusing too heavily on tax can land you in hot water.
There's significant attention on the future of negative gearing at the moment in Australia, given the big changes in the works if the Labor party is elected to federal government in May.
With all this attention on gearing, it would be understandable if first-time property investors are thinking about how it impacts their investing journey, but according to Mr Tarrant, negative gearing is not a strategy – it is an outcome.
Speaking on the Property Investing Matters show, Mr Tarrant together with host Margaret Lomas answered a question from viewer Jason, who said he was looking to start investing within 12 months; he asked whether he should focus on positive gearing or negative gearing.
Focusing first on how a property is geared, Mr Tarrant said, is not the way to go about investing in property.
“When I see questions like this, and we get them all the time at Smart Property Investment, I just sit there and it gives me an idea of the mindset of the person who invested, and they’re thinking, ‘I should invest in property because they get negative gearing and therefore if I’ve got negative gearing, I’ve got some tax deductions’,” he said.
“What I would say is if you’re investing in property, initially you will probably find that your property is negatively geared, and as it matures over time as an asset it will turn into a more neutrally geared position.
“Now, it’s all circumstance to you, what you do for a living, how much you get paid, what your wealth situation is and how much deposit you have and what sort of mortgage you get, all these different things will influence whether or not your property is positively geared or negatively geared.
For first-time investors, Mr Tarrant recommended to do some calculations and work out how the property will be geared now and then in five years’ time.
He also said to discuss gearing-relation questions with an accountant, as they are best equipped to answer.
Ms Lomas added that the most important aspect of property investment is the growth prospects of property and the area, while gearing is an outcome of cashflow and as such should be considered last.
“While it might be nice to have a property that gives you a positive cashflow from day one, if all you’re doing is buying with that in view, you’re not going to consider the other important aspects of that property purchase that will influence whether it grows in value or not,” Ms Lomas said.
“Cash flow is what keeps you in the market and growth is what allows you to one day have more assets under your belt to give you those choices in retirement and potentially get out of the market.”
However, that does not mean cash flow is less important, as Ms Lomas said if the cashflow is too negative, then an investor cannot wait for growth as there will be no income to support the property.
She also said a cashflow that is too positive is also an issue.
“If the property is too positively cash flowing, very often that could be because it exists in an area where the positive cash flow is there because of the high demand for rental but not a lot of demand for buying and therefore it might not grow as well,” she said.
It is important that growth and cashflow are balanced, but that balance is the last thing that should be considered, Ms Lomas concluded.