Negative gearing is not a valid long-term investment strategy due to the uncertainty of capital growth, according to one mortgage broking group.
Investors need to considering negative gearing as a way to get into an investment, rather as something that can be lucrative over the long term, said Smartline Personal Mortgage Advisers’ executive director, Joe Sirianni.
“If you take a long-term view of your property investment, and property should always be a long-term consideration, if you are negatively geared for 20 years, that means that for 20 years you’re paying more money out of your pocket than you’re recouping from the property,” Mr Sirianni said.
Instead, investors need to crunch their numbers and treat each purchase as a business.
“At some stage your business – and your property investing – needs to be putting money back into your pocket,” he said.
“Many people justify having their property negatively geared because they believe the capital growth of the property will make up for the losses in the long run.
“While capital growth might have saved a lot of investors with negatively geared properties in recent years, I’d be cautious about relying on capital growth in the coming years.”
Income needs to be the number one reason for purchasing an investment property, and negative gearing can put pressure on investors, particularly those on lower incomes.
“When you calculate the net after tax cash flows of an investment property, being on a lower tax bracket means it’s actually costing more to run that strategy,” Mr Sirianni said.
“Ultimately, it’s actually the income that the property generates over time that is more important. For very long-term investments, it’s the income that has the most benefit and makes investing worthwhile.”
He points to regular rent increases and cash flow as hallmarks of a good investment.
“Even if you get [capital] growth, that growth is really just making up for your losses, you’re not actually really moving forward.
“It’s the surplus income over time – by having regular rent increases – that is going to make the difference,” he said.