Everyone talks about negative gearing as the go-to investment strategy.
But is it really worth all the hype?
Hi everyone, Kim from Duo Tax here.
When it comes to investment property strategies,
positive gearing is considered a more conservative investment strategy.
According to the ATO, around 30 percent of Australians own an investment property,
and within that, 40% of those are neutrally or positively geared.
That means that 60 percent of investment properties are negatively geared.
But when things are trendy, it’s easy to just hop on the bandwagon without actually thinking
about what you’re getting yourself into. So, it’s worth doing your homework and making sure
that you consider all investing strategies related to your circumstances and goals.
In today’s video, I want you to consider whether using
the positive gearing strategy could work for you.
Property investors always weigh up their options
based on tax consequences, so make sure you watch until the end to learn about what you’re
in for when it comes to paying tax on positively geared properties.
Before we get into it, we want to be clear that this video is for informational purposes. In
no way should you interpret this as tax advice. We always recommend working with
a qualified accountant or tax agent who can give you the best advice for your situation.
Okay, so what is positive gearing? Well, to put it simply, having a positively geared property
means that your rental return is higher than your home loan repayments and other property expenses.
So, you’re consistently making a profit from your investment property.
Let’s take a look at a simple example for illustration purposes.
Richard purchased his first investment property in Melbourne for $485,000 in a suburb just outside
of the city. Because of the prime location, he manages to rent out the apartment for a strong
rental return of $575 per week. Assuming that the property expenses he incurs amount to $460
per week, Richard can cover the expenses with the rental return and have a surplus
of $115 per week. So this means that Richard’s property is positively geared.
Having a positively geared property means that you’re likely to continue generating a steady
income stream while you wait to realise the property’s long-term growth - especially if
you buy the property in an area with high rental demand and strong rental returns.
Another advantage of having your property positively geared
is that it’ll pay for itself. As you saw in Richards’s example,
his rental income covered the expenses incurred from owning the property.
This means that he doesn’t need to use part of his wages to cover the home loan repayments.
Having a positive cash flow means less pressure if your financial circumstances happen to change.
Lastly, if your investment property is generating enough income to cover your expenses and more,
the positive cash flow can help grow your income, meaning that it could be
easier to secure another home loan to expand your property portfolio.
When it comes to paying tax on your positively geared investment property,
just like the income you receive from your wages,
the income you generate from your investment property is subject to tax.
Investors love the idea of negative gearing because they just want to focus on reducing
their tax liability. But if you had to compare reducing your tax liability
and actually making a profit on your property making a profit is a good thing.
It shouldn’t be considered a bad thing just because it comes with slightly more tax liability.
That’s not to say you should stop finding ways to reduce your tax liability,
it just shouldn’t be the deciding factor for choosing an investment strategy.
So even though you’ll naturally have to pay some tax on positively geared property,
there are still some beneficial tax deductions that you can claim to reduce your taxable income.
The top three tax deductions most people claim are.
Number one, depreciation, which allows you to
claim a deduction for your building’s general wear and tear, and its assets.
Number two, interest on your loan, this is the most significant tax deduction you can claim.
And number three, rental expenses. As a landlord, you’ll have to pay a whole bunch
of different expenses such as advertising, cleaning and quantity surveyor fees.
Just like any investment strategy, it’s also important that you take into account some of
the possible risks of using it in relation to your current financial circumstances and future goals.
When it comes to finding properties with the potential to be positively geared,
it’s a lot harder than it sounds. Negatively geared properties
are so much easier to find in Australia.
High demand means higher prices and lower rental yields.
The lower the rental yield, the harder it is to have your property produce a positive cash flow.
But it’s important to realise that, while positively geared properties are harder to find,
they aren’t impossible to find. These properties do exist,
you just need the right team in your corner to help you find these properties.
If you need help with this, check out our video on the
four property professionals you need on your side.
The next factor you should consider is that you’ll likely end up paying
higher upfront capital. Not only are these properties generally higher in price,
but by paying more upfront, you’re decreasing the amount of money you have to borrow from the bank.
Smaller mortgage repayments will make it easier to generate a profit
from your rental income. At the end of the day, it all comes down to planning
and keeping up to date with economic and property market fluctuations.
That’s why we emphasise on building a team of property professionals
to help you navigate through making the right decision for you and your circumstances.
I hope you’ve learnt some valuable information about positive gearing. If you have any questions,
please leave them in the comments below, we would be happy to help!
Alternatively, make sure to like and subscribe to learn more property investing tips.
I’m Kim Quach from Duo Tax, see you next time!