How does it negative gearing work and is it a profitable investment strategy?
Today we are talking about negative gearing at the very basic level and we are going to
talk about exactly how negative gearing works and why so many investors in Australia invest
using negatively gear approach.
I'm Ryan Mclean from PositiveCashFlowAustralia.com.au where we teach people like you how to find
invest in positive cash flow properties or all over the country.
If you want detailed step by step videos on how you can find positive cash flow properties
in Australia and how you can research so you are confident enough to invest then head over
to PositiveCashFlowAcademy.com and sign up for our training videos out there.
They are so awesome, I was actually just watching one doing research for one of my videos and
I was like "what's that site that I used when I did the academy" and the video is actually
very powerful stuff.
We will train you to look for the right things.
That is about PositiveCashFlowAcademy.com.
Now for the salesy pitch-how does negative gearing work?
Let's look at how it works and then let�s look at why so many people invest using negative
gearing.
The first thing with negatively gearing is that you lose more many than you make.
So what this means?
You've got an investment property and you are renting it out but the rent does not cover
all of you expenses.
That might be more insurance, cancel rates, utilities, all the different things that come
with owning a property.
So let's look at an example...
We have a property and let's say it rents for 300 dollars per week but let's say that
our overall expenses all come in for 50 dollars per week.
Well that rent is not going to cover all of those expenses, we're going to be 150 dollars
short a week and we are going to have to pay 150 dollars out of our own money towards that
property every single week to keep it going otherwise we wouldn't be able to afford our
mortgage payments and the bank will shut the shell out and sell our property for us.
That fact that we have to shell out money to pay for that property makes it negatively
geared.
So why does so many people do it if you are having to put out money and lose money?
Well there is many different things that make negatively geared property exciting for the
investors.
First is the obvious one and that is capital growth.
If you can lose 5000 dollars a year on property for a ten years then you have lost 50 000
dollars over that ten years.
But what happens if that property goes up 500 000 dollars in that ten year period?
Well you have lost 50 000 dollars but you have made 500 000 dollars so your profit on
that is actually 450 000 dollars.
So if you are getting the capital growth that you want from the property it can be very
profitable to be owning negatively geared properties because of the capital growth and
the value of the property can be so significant that it just out ways any cash that you are
going to have to put in it anyway.
So, capital gain is the number one reason why people invest in negative geared property
in Australia.
The other reason why people like to invest in negatively geared property is that tax
savings associated with it.
Remember how we were shelling out money to pay that property?
Well that is money from our own job that we have already paid tax on so maybe you are
in a 30% tax bracket.
So you have already paid tax on that money and now you have pay to keep this investment
property going.
The government says that �because it is investment property and you are investing
in your future we are actually going to give you a layout that loss on your property as
a tax deduction� and what that means is that you can then say "Well I've paid 5000
dollars but that was actually a loss, I've lost 5000 dollars" in that financial year.
So you take that back to the government and you say " I have earned 70 K this year but
I've lost 5000 so let's say I've earned 65 000 dollars.
It is very simplified way to look at it, that is not really how it works guys.
But you are getting that 5000 tax free.
Talk to your accountant about this stuff, this is only for the educational purposes
and is a very simplified version of this.
By losing money you are getting tax savings.
So if you are in a 30% bracket and you lose one dollar then you are going to get 30 cent
back.
You still have lost 70 cents but at least you got 30 cents back.
Another advantage of negatively geared properties is using the depreciation to your advantage
to gain even more tax savings.
But depreciation is where the property itself like the building and the stuff inside the
building is going down in value and even though you are not forking out money for it you can
claim it as a loss.
And because you can claim it as a loss and you can then (if you are earning a lot of
money) get tax back on that loss so you are getting tax back for something that you haven't
got to dish you out that year, it's just lower in value.
By using depreciation you can get even more tax savings and again, always talk to your
accountant before lodging any of these stuff.
And lastly is rental growth.
You can get some great rental growth on negatively geared properties pushing then into positively
geared territory.
So you might buy property and it is negatively geared but over time the property value goes
up so you gain that capital growth you want but the rental yield is going up as well so
each year let's say you raise rents by 10 or 20 dollars a year and over time the rents
are going up and maybe you are paying down your mortgage and interest rates have come
down and so you expenses have stayed the same or they have gone down.
Over time that rent is going to start to cover your mortgage and all of your other expenses
as well and move you into the positive cash flow territory.
This happened to a friend of mine, he had purchased an investment property that was
negatively geared but what did happened is that interest rates decreased significantly.
He had also paid off some of his loan and he was then able then to refinance and turn
that into a neutral geared property so it is not costing him any money at all to own
even though it was previously negatively geared.
And soon, just a couple more rental rises and he is going to have a positively geared
property on his hands.
And tenancies are going to be paying his property for him so even though he started off dishing
out his money he is now getting these positive returns that he wants.
So this is how negative gearing works and why people do it, making loss then to then
gain in tax savings and then also to gain in capital growth as well.
I am Ryan McLean, if you want more videos podcast and articles just like this one then
head out to PositiveCashFlowAustralia.com.au and if you are on the podcast or watching
on a YouTube or you are on your mobile phone then you can type out pca.im, that is my short
link that will redirect you to the website.
Until tomorrow which is when the next episode comes out stay positive!
And if you have hung around this long you guys would know that I always do something
at the end of the video you should know- this video is sponsored by Mother, keeping me energized.
Mother is actually not my energy drink of choice.
I know I shouldn't drink energy drinks, they are not very good for you.
My energy drink of choice is V but Mothers were four for 5 dollars of these big one at
Woolies today so I went ahead and I made the switch because 4$ vs.12$ for four was kind
of a no-brainer.
Check out this post that I have hyperlinked in the YouTube video if you want more information
if you are on the podcast.
I�m just being silly now...
Hey, I do so many videos, I have to have some fun on the end of it, right?
All right, see you soon!