Another Day, Another Idea To Fix Housing Affordability

Using super to buy a home… Is this the dumbest idea ever?

Recently I discussed the suggestion from various politicians including Barnaby Joyce that buyers trying to break into the market look to more affordable areas. The idea that currently has momentum, however, is allowing first home buyers to access their superannuation (super) early to use it as a deposit for a property.

Currently super can be accessed prior to retirement for a variety of reasons. These include severe financial hardship or permanent disability, but buying a home is not one of them.

The idea of allowing young buyers to dip into their retirement savings keeps coming up time and time again. Liberal MP John Alexander one of the biggest advocates. That’s despite it flopping when Paul Keating first raised it back in 1993, and even he, seemingly forgetting his election platform back then, has now rubbished the idea.

In my humble opinion, it’s the dumbest idea ever.

pro cons for housing affordability

The argument for

The point of allowing first home buyers to access their super early is of course to enable – or at least help – them to get into the property market sooner, before prices rise even further out of reach.

Advocates point to New Zealand, which has adopted this policy, and has a quickly rising take-up.

And that’s about it for the positives of the argument.

The argument against

The arguments against the idea are numerous, far outweighing the positives.

The thing is, allowing first homebuyers to use their super for property is actually likely to worsen affordability. Prices are likely to be driven up due to an increase in the capacity for people to pay for housing. So, essentially it would be counterproductive.Depreciation Quote Schedule

Not only would it likely lead to a surge in demand, with more buyers in the market, but it will give those who can already afford a house more money to play with. Meaning they’ll be able to pay more for property, driving up property prices. Existing home buyers will be the only winners.

On top of this, it would severely compromise the whole point of super, which is to provide an income in retirement.

Not only will the lifestyle of our future retirees be significantly hampered, but they’ll likely be completely reliant on a government pension. But will we as a country even be able to afford to pay all these people to live? Probably not – which is why super was introduced in the first place.

Retirees might own their own home, but what will they use to live off? Don’t forget, this includes buying food and paying for living expenses.

The reality is that most young people don’t even have enough money in their super accounts for a home deposit. A recent analysis finding displays the average super balance for young people was lower than what’s needed for a 20% deposit.

You see, you get the most compound growth in super during and after your youth. This is when you’ll grow your balance. Making it a big part of why the money needs to be left there.

So if you ask me, this is not the time to tell someone with all their life savings in a quality super fund with a mix of asset classes to take out all their money and bet on one asset class – housing. This is especially the case since property prices are likely nearing – or are at – the top of the market in Sydney and Melbourne. So the potential is there to actually lose money if overzealous first homebuyers pay too much.

 

housing affordability

What should be done instead?

Investors have largely been blamed for rising house prices and for pushing first home buyers out of the market. However, nagging proposals to get rid of investor benefits such as negative gearing and the 50% capital gains tax discount have been supposedly taken off the table.

Market forces should be left to iron out the problems in the market. But if government intervention is needed, the best solution is likely to be an increase in supply. The Depreciation Calculatorsupply is needed especially in Sydney and Melbourne.

It would also be wise for governments to invest in infrastructure in regional areas. Or those further from the city to draw people away from our capitals and into areas where demand is not so great.

According to basic economics, when demand is greater than supply prices are pushed up. So, if supply is increased but demand stays the same prices should level out. Or at the least, grow at a slower rate.

Conversely, if you increase demand, as allowing buyers to access super would do, but keep the supply the same, prices will be driven even higher.

So, what is actually going to happen? Will first homebuyers be allowed to dip into their super in Australia?

The Federal Government has committed to addressing housing affordability. However, for now they seem to have taken this idea off the table due to widespread criticism. Although we will have to wait and see what their solution is in the May budget.

I, for one, can’t wait for the next bright idea!

The 14 Property Must Haves For Every Property Investor

Every investor – whether expert or amateur – should be looking for the same things in a property investment to ensure its success.

While there is no exact formula for buying a successful investment, it’s handy to have a checklist to consult to make sure you’re on the right track.

property must haves

Below are some of the fundamentals you should be looking for when buying. Be aware that this isn’t an exhaustive checklist. However, it can serve as property investment tips that will help guide your decisions.

Property must haves:

Is Housing in Australia Affordable?

Ahhhhhhhh, housing affordability. That old chestnut. It’s a topic that’s been hotly debated a million times over! And will no doubt continue to be for many years to come.

The general consensus is that property in Australia is unaffordable. The results of a recent survey seemed to confirm this, with the proportion of adults who own their own home falling from 57% in 2002 to 51.7% in 2014.

Housing in Australia Affordable

The annual Household, Income and Labour Dynamics in Australia survey, authored by Professor Roger Wilkins from the University of Melbourne, also found that the rate of home ownership is expected to keep falling, and may drop below 50 per cent as early as next year.

So, is home ownership falling because Australians simply can’t afford to buy properties due to hugely elevated prices, or is it due to other factors?

Property prices have significantly grown

It’s certainly true that property prices have significantly risen in Australia over recent decades.

The median dwelling price for the combined capital cities is currently sitting over $500,000, according to CoreLogic. But prices of course range widely between the capitals. Hobart is the cheapest at around $300,000 and Sydney being the most expensive at nearly $800,000. Depreciation Calculator

This decade so far prices have risen across the board by 35%, and over the previous decade they rose by around 140% according to CoreLogic figures.

But since the beginning of 2010, it’s been the two major capitals of Sydney and Melbourne that have seen the majority of growth. Prices are increasing by around 60 and 40 per cent respectively (as at May this year). The other capital city markets have seen either little growth or have fallen in value, so theoretically, in some places affordability is actually improving.

This is especially the case when you consider interest rates; in this regard 2016 actually presents quite a good time to buy with the cash rate now sitting at a record low of 1.5%; very different from the double-digit interest rates investors experienced decades ago.

We, of course, also need to consider incomes in relation to price growth. Depending on who you ask, there can be a case to say housing has or hasn’t become more unaffordable. It’s clear, however, that house prices have risen faster than incomes, making it harder to save for a deposit.

 

Priorities are changing

While property prices have clearly risen, it’s also the case that priorities for more recent generations have changed.

Once upon a time – not that long ago really – youngsters left school and got a job, with their primary objective being to save for a deposit to buy a home.

Nowadays, however, younger generations seem to have different priorities. They often leave school with the intention of travelling abroad for a gap year (or two or three). Or if they go straight into a job they’re not necessarily saving, but buying the latest gadgets; in our modern society it’s about instant gratification.

So does that have an impact on affordability?

It makes sense that it likely impacts on the ability to save for a deposit.

We need to consider which is the cause and which is the effect, however. Some – including a Sydney real estate identity recently – argue that this generation is simply too selfish to make the necessary sacrifices, such as cutting back on commodities such as widescreen televisions and designer clothes, to save and get a foothold in the market. Depreciation Quote Schedule

But on the flipside others argue that priorities have changed simply because it’s impossible to save the huge deposit required for property these days. So younger generations are instead deciding to spend their money on something else because property is out of their reach.

But are the expectations of younger generations now just too high? When they complain about property being unaffordable, is that because they want to buy a flash pad in inner Sydney as their first home, rather than buying something further from the city in a price bracket they can actually afford? Essentially, many want to buy what would traditionally be their last property – often what their parents have worked their way up to – first.

Add to all this the fact that renting has also become more socially acceptable. The Great Australian Dream perhaps fading a little, and we have a little more insight into the affordability debate.

Consider your options

It’s clear that the debate around housing affordability isn’t clear-cut; there are many aspects to consider. As the debate continues to rage, demands for reform or government measures to curb price growth will persist.

While Australian property prices have risen and are unlikely to fall (despite claims from doomsayers), leading many to feel as though it’s impossible to break into markets such as Sydney, there are always more affordable opportunities within each capital city if you care to look. Consider buying further from the city, or a unit instead of a house. Scale down your expectations and buy where and what you can actually afford.

And if you don’t want to scale down your expectations, become a ‘rentvestor’. This means you choose to rent where you want to live and invest where you can afford to buy.

For investors, it’s of course better to buy where there’s more potential for growth. Chances are that’s in an area that hasn’t already seen huge growth. Yet where there are lower prices with more room to move.

Should You Buy For Capital Growth or Rental Yields?

When it comes to purchasing property there are a multitude of factors to consider. Where should you buy? What should you buy? How much should you pay? While these are the most common questions investors will ask, perhaps one of the most pertinent questions that needs to be answered before anything else is ‘Why should I buy?’

To put it more clearly, you need to have clear goals for why you’re investing in property, and then devise a strategy to help you achieve those goals. Surprisingly this isn’t something many investors do, but it’s essential for success.

A large part of your strategy will be determining whether you need to buy properties that offer strong capital growth or rental yields.

There are those in each camp espousing their respective benefits, but which one takes precedence is often different for each investor depending on their financial circumstances. Ultimately, however, every investor should be aiming to acquire a property that offers both – not one or the other.

Capital growth

capital growth or rental yields

Capital Growth Property

Having a capital growth strategy means you’re aiming to buy a property that experiences strong growth in value over time.

A property that has the best chance of growing in value is one for which demand outstrips supply. It’ll be in high demand due to its investment fundamentals – that is, it’s in a good location, close to employment, amenity and public transport, and there are imminent growth drivers such as infrastructure projects.

Often properties with high potential for capital growth have lower yields and are therefore negatively geared, with expenses exceeding the income.

Rental yields

Having a high-yield strategy means you’re aiming to find a property where the rental income covers most, if not all, of the costs associated with owning it.

While the capital growth on these properties will often be lower, they won’t cost you as much to hold. Depreciation Quote Schedule

Having a strong rental return is more important than many investors realise because it enables you to hold onto a property for the long-term while you wait for capital growth. If your portfolio is too strongly negatively geared you can run into financial trouble – if interest rates rise, for instance, or you have a big unexpected expense, you’ll be forced to find more to pay out of your own pocket.

Can you have it all?

Believe it or not, you can have a property that offers both good rental returns and capital growth.

It may not be easy to find, but if you do thorough research the right property in the right location will provide both. That’s not to say a high-capital growth property will necessarily provide an investor with positive cash flow, but it may be only minimally negatively geared after tax deductions.

What you should be aiming to buy is a property that offers the best possible cash flow for the best possible growth. You need both to invest as the former will keep you in the market, enabling you to service the debt, while the latter will eventually get you out, enabling you to realise a profit.

If you can’t find a property with both capital growth and a solid yield from the outset, then find one that has all the fundamentals for capital growth and where the yield is likely to increase soon due to strong rental demand.

Your yield can also be improved through measures such as minor renovations, adding extras or even by furnishing your property (for more on this see our upcoming blog providing 13 suggestions for maximising your rental yield).

How can you decide which to prioritise?

The broad goal of property investing is to create wealth over the long term, and it’s clear that focusing on capital growth is the way to do this.

While a property investment’s yield is crucial to its success, it’s not the key to wealth creation, and when investors make the mistake of prioritising yield over growth, they usually end up losing money.

High-yielding property might seem tempting, but when you do some simple calculations it’s evident that in the long-term you’ll make more by focusing on capital growth. Not only will your property be worth more, but the rental income will also be higher. Consider the following example:

Purchase price Yield Capital growth Value in 20 years Income in 20 years
Capital growth strategy $500,000 5% pa 10% pa $3,363,750 $168,188 pa
High-yield strategy $500,000 10% pa 5% pa $1,326,649 $132,666 pa

Capital growth will also largely be the key to expanding your property portfolio;

it will give you equity, which you can leverage off to buy more real estate.

While capital growth is the key to creating wealth over the long term, you will also need to be able to service further debt with subsequent purchases, and that’s where rental yields come in. Depreciation Calculator

Ideally with each purchase you’ll be aiming to have both strong capital growth and decent yields, but if you have a portfolio of properties you may also opt for balance – that is, to have some that are negatively geared and some that are more cash flow positive. The surplus cash flow from the high-yielding properties can be used to cover the costs of the low-yielding properties.

Tax deductions can also help you service debt and hold your property, minimising any shortfall between rental income and expenses.

Just how much of a shortfall you can afford will depend upon your circumstances at the time you buy. If you don’t have a great deal of surplus cash you’ll need to look at focusing on high-yielding properties so your holding costs are smaller, while someone with an adequate surplus will be able to comfortably meet the shortfall between rental income and the costs of holding the property, and will be able to focus on a capital growth strategy.

This may change over time – once you have acquired a few high-yielding properties your improved cash flow might allow you to focus more on capital growth.

Negative Gearing Solution | Washington Brown

negative gearing solution

(UPDATE: Some changes to negative gearing were made in the 2017 Budget – Read about the Budget changes here).

Now I’m not one to whinge about  a system without a solution…I think the current Negative Gearing model needs some repairs for two reasons.

Reason 1 – The system was not designed so that someone could buy 100 properties, off-set those losses against personal income and never pay tax in the foreseeable future!

Reason 2 – Someone should not be able to buy a $20M house, get a terrible yield of 1-2% on such a large purchase price and offset the difference against personal income.

NEGATIVE GEARING SOLUTION

Solution 1 – Cap negatively geared property to a maximum of 3 properties per person over their investing life.

Solution 2 – Cap an individual property to the median price of an Australian property. (This takes into account the vast range of average prices across the board). So someone could buy a house in Sydney + one more in Brisbane for instance, or perhaps 3 properties in Hobart?

I’m interested in your thoughts so please leave your views below…

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6 Reasons Why Negative Gearing Stinks

Dear Fellow Investors,

negative gearing

Cuts to Negative Gearing Stink

I get it. I get what Bill Shorten and the Labor Party are trying to achieve by cutting negative gearing…but it stinks for 6 reasons.

First, for those of you who might not know…Labor proposes to:

  1. Eliminate negative gearing to all residential investment properties other than new housing from the 1st of July 2017.
  2. Stop investors from claiming losses on secondhand properties against their wage income after that date.
  3. All investment properties purchased prior to this date will be “grandfathered” (meaning any current tax arrangement with your investment property will remain).
  4. Reduce the capital gains discount on all investment properties from 50% to 25%.

Stinky Reason #1 – How much will the budget be improved?

The latest data from the ATO shows that in the year 2012/13 property investors “negatively geared” or reduced their taxable income by approx $5.5 Bn. That’s $5.5Bn that the Government could have taxed (not necessarily collected).

Firstly, this data, the most recent available, was based upon a period when the RBA cash rate was higher than it is now.

Interest rates on borrowing have dropped since that time – meaning the losses investors can now claim will be reduced.

Back then, the outstanding rate of interest was close to 5.5%. It’s now close to 4.5%. That’s a drop of 18.2%.

I can currently get a 5-year fixed rate of 4.59% from NAB and there are many others

If you reduce the amount investors have claimed in interest by 18% – there goes those negative gearing losses even allowing for CPI increases of other deductibles.

In order to get Labor’s forecast of $32Bn in savings over 10 years, Treasury must have predicted some significant increase in interest rates from years 6-10 right?

But let’s face it….Treasury can get it wrong – remember its forecast for iron ore prices? It was totally optimistic.

Stinky Reason #2 – Negatively Gearing new property only is risky business…

“Roll Up Roll Up”…I can hear the spruiker cry…

By allowing only new properties to be negatively geared….you are creating a “green light” situation for every spruiker to come out of hiding and promote new property to unsuspecting mum and dad investors.

Depreciation Calculator

Selling new property is far less regulated and commissions are rife. Time and time again I get offers to sell property to my database and receive a 10% commission on the purchase price. But I don’t.

Whilst I’d love the 10% my father lost all his super from the dodgy side of the property market and the last thing I’d want is for someone else to go through that experience.

Tip – Have you noticed spuikers generally only sell new property?

That said, not all people selling new stock are bad – currently most are good…but this type of policy might attract less scrupulous spruikers after a quick buck or two.

Stinky Reason #3 – The Reverse effect

I get it – Labor’s policy aims to increase home affordability particularly for first home buyers.

Yes. Australia is expensive on the world stage – BUT could stopping negative gearing actually inflate prices?

How? Well the first thing I thought when the policy was released was “no point selling any properties I currently negatively gear – I’m hanging on!”

According to those ABS stats I previously mentioned – there’s close to 3 Million properties that might not be sold if everyone thinks like me!

Now, I’m no Warren Buffet but I do remember one thing from economics…price is a factor of supply and demand and if you take away the supply….prices tend to head north.

Stinky Reason #4 – The elephant in the room

This stinky reason is a surprising one, and in all my research I haven’t seen any mention of it.

Whilst the Government may, in the long term, claw back some revenue if this policy is implemented, if property transactions decline, the States are going to be significantly impacted by way of stamp duty collection.

If investors hold onto stock…the building industry won’t be able to magically increase supply to make up the difference.

And if you have far less transactions, you have far less real estate agents, conveyancers, buyers agents, brokers etc paying income tax.

Stinky Reason #5 – Slippery Slope

Labor has also proposes to cut negative gearing on new share investments. This leads to a whole bunch of questions such as:

  1. By shares are we talking listed only or unlisted?
  2. How are super funds treated? Family trusts?

And back to property…

  1. What if I buy a commercial or industrial building? If bought in my own name it appears I can still negatively gear it. However, if that same building is part of a listed trust, then I guess I can’t. Please explain??
  2. Is “property” treated as land + building and plant and equipment separated? Because that’s how the CGT calculation is calculated.

I could go on…

Stinky Reason #6 – The Renovators

“New property” is not all about starting from scratch.

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Don’t underestimate the amount of people who like buying and upgrading property. This has a multiplier effect in that money is being injected back into the economy through the employment of trades and the purchasing of goods and services etc.

Final Point:

Now I’m not going buy into the debate over whether negative gearing is for the “rich” or for the working class. I would’ve thought it was pretty obvious that those with higher incomes benefit more from negative gearing.

And I don’t buy the argument, from the Real Estate Institute of NSW, that rents will suddenly go up because negative gearing is taken away. Rent is a factor of supply and demand – not what it costs an individual to hold a property.

What I worry about is the risk/reward ratio. I think at this point of the economic cycle (China’s downturn, mining slump, drop in commodity prices and a property boom in most major capital cities around the world)… this policy is potentially playing with fire for very little reward.

I agree there are certain elements that need to be fixed to make the system fairer and here’s my thoughts on that.

Regards

Tyron Hyde
CEO AAIQS

PS – If you think I’m writing this article as a staunch Liberal Voter…you are wrong. I was brought up to vote Labor. In fact, my father ran for the seat of Lowe in 1975 against Billy McMahon! I’m currently politically agnostic (my father would be turning in his grave) – but times have changed!

What is Negative Gearing Investment Property?

negative gearing investment property

Negative Gearing Property Investment

What is Negative Gearing Investment Property?

Put simply, negative gearing is a tax benefit offered to investors on their borrowing costs.

If your borrowing costs exceed the revenue gained from your investment, you are entitled to claim those losses against your total income.

The benefit of gearing is that it allows you to own investments that would normally be out of reach, giving you the opportunity to make a greater return on your outlay.

For instance, Jenny uses her $50,000 deposit to borrow $350,000 and buy a $400,000 investment property. At 8% the annual repayments total $28,000 on an interest only loan. The rent she receives from this property is $400 per week, or $20,800 per year – leaving her out of pocket by $7,200 per year.

Other expenses include rates, levies and maintenance costs, which add up to $3,500 per annum. Jenny has now spent $10,700 to own that asset over and above the income she has received for it.

So when it comes time for Jenny to do her taxes she will be able to reduce her taxable income by $10,700. That’s negative gearing.

But wait there’s more!

Jenny’s property was built in 1995 and Washington Brown Quantity Surveyors has advised Jenny that she can claim $8,000 in the first year for depreciation. Depreciation Quote Schedule

So now Jenny can tell the ATO to reduce her taxable income by $10,700 plus the $8,000 in depreciation allowance (a total of $18,700).

The reason we have separated the depreciation from other out-of-pocket expenses is because Depreciation Allowances are not reliant on whether the property is negatively geared, positively geared or cash flow neutral.

Is it worth is?

At the end of the day, it’s called negative gearing because it involves a loss.

So why would you want to spend more money on your investment than it pays you to own it?

Most investors are willing to accept a loss in income if they believe they will be compensated by capital growth in the future. But you must be able to fund this shortfall while you wait for the investment to appreciate in value.

You also need a taxable income from which this loss can be negatively geared against. And the higher your income, the higher the benefit will be.

For instance, if Jenny were on the highest tax rate of 45 percent, her $18,700 loss has now resulted in an $8,415 tax refund ($18,700 x 0.45% = $8,415). So in real terms it has only cost Jenny $2,285 ($10,700 – $8415 = $2,285) to maintain this investment in that particular year.

So for approximately $44 per week, Jenny owns an asset that will hopefully increase in value. If her property appreciates 5% in the first year, that’s an increase of $20,000 with a $2,285 holding cost.

Sounds good doesn’t it!

But the reverse applies – if Jenny’s property goes down 5% then she’s lost $20,000 off the market value of that investment. Depreciation Calculator

At the end of the day, there is no point negative gearing into an asset class that decreases in value.

But history has shown that if you buy well-located property at the right price and hold it long term, it has been a great investment.

And if you can do that whilst keep the holding costs to a minimum – then your gains are magnified.

Can you afford it?

MoneySmart, the consumer website of the Australian Securities and Investments Commission, suggests the following three things to help make negative gearing succeed:

  1. Buy good quality investments, preferably with a reliable and rising income stream.
  2. Borrow conservatively so you can survive interest rate rises and possible loss of income.
  3. Maintain reliable income from your job or other sources to cover your borrowing costs, especially in the early years.

7 Reasons Why I Like Property

reasons why i like property7 Reasons why I like Investing in Property

Reason # 1 – You can Add-value

You can buy a rundown old property and increase its value by getting your hands dirty (or paying someone else to)! It’s hard to add-value to my Commonwealth Bank shares. Sure I bank with them but I don’t think my savings account is going to affect the share price! Depreciation Calculator

Reason # 2 – Limited Supply

Property takes a while to plan and build. The demand and supply equation has lots to do with the price of property. With shares, the company can do a capital raising at any time or issue options, this may dilute your shareholding and its value.

Reason # 3 – Capital Gains Exemption

Unlike any shares I currently own, the home I live in does not attract capital gains tax. This has been lucrative for many Australians and I can’t see the law changing in this regard any time soon.

Reason # 4 – Keep it Simple Stupid (KISS)

Property is easier for me to understand in comparison to shares. Granted I work in property, but I know if I buy a property for $500,000, I can get $500 a week rent and comfortably work out other expenses. Share prospectuses and annual reports are usually not as straightforward.

Reason # 5 – Master of my Domain Depreciation Quote Schedule

I’m the CFO of my property investment and answerable to the board directors that I care about, my wife. I don’t know about you, but I’m pretty sick of golden handshakes to CEO’s and directors that pretend they have shareholder value at heart. Really?

Reason # 6 – Don’t remind me

I like property because I’m not reminded of how much I have lost or made every day. I don’t want to wake up and wonder what the NASDAQ did overnight and what my share portfolio might look like at market open.

Reason # 7 – Margin Calls Stink!

Even if my property has gone down in value, which it hasn’t, it’s very unlikely a bank will make a “margin call” and force you to sell. Margin calls can be unsettling, as it may force you to either come up with cash quickly or sell stocks at a time when you don’t want to.
Give me property any day!

reasons why i like property

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Chasing High Yield Property – What to Look Out For

High Yield Property

High Yield Property

Chasing High Yield Property

One of our clients recently purchased of a block of 6 units in Port Macquarie and initially I thought “Wow, what a good deal.” Depreciation Calculator

The client had purchased 6 units for a total of $550k and according to RP Data each unit was renting for $130 per week. So that’s $780 a week in rent which equates to roughly a 7.5% yield. Not too bad and he was obviously chasing a high yield property.

We were engaged to prepare depreciation schedules on the 6 units, so we inspected the property and gathered the relevant data and inspection photo’s.

When I reviewed the job and the photos it was clear the client had purchased an incredibly run down block. In my opinion, this block was in need of major capital improvements in the coming years.

I think the client could be facing repair work in the region of $30,000 per unit – that’s $180,000 – in order to make them fit for occupation in the near future. That will certainly eat into what looks like a very good yield on paper.

So the moral to the story is that property investors should always consider future upkeep into the real investment yield equation when doing their figures. Sometimes there is a reason a property is showing a high yield – and the future capital expenditure may play a part in that.

If you have bought an investment property and need a quote for a depreciation schedule – click here or try and work out how much you can save using our free depreciation calculator

Speaking of maximising investments – here’s a video I made on a similar topic that you might enjoy…

The Difference between Positive & Negative Gearing

Positive Vs Negative Gearing

What is Negative Gearing?

Negative gearing is a tax benefit you can claim if your borrowing costs are higher than the money you’ve made from an investment property. These losses can be claimed against your total income and increase your tax return and therefore, your income on your investment.

For example, Jenny had a $50,000 deposit and borrowed $350,000 to buy a $400,000 investment property. Her annual repayments total $28,000 on the interest only loan at 8%. She rented this property at $400 per week, or $20,800 per annum so she actually lost $7,200 per year. Plus there were other expenses: rates, levies and maintenance costs which added up to $3,500. Jenny has now spent $10,700 to own that asset over and above the income she received.

Jenny will be able to claim this $10,700 loss against her taxable income by $10,700, this reduces what she might have to pay in tax. That’s negative gearing because it involves a loss.

Why Negative Gear

Depreciation Quote Schedule
Most investors are willing to accept a loss in income if they believe they will be compensated by capital growth in the future. The catch is you have to fund this shortfall while you wait for the investment to appreciate in value. You’ll also need a taxable income to negatively gear this loss against. The higher your income, the higher the benefit of negative gearing as it will decrease your taxable income so negative gearing is a better option for high income earners.

What is Positive Gearing?

Positive gearing is the exact opposite of negative gearing, this is when the income from your investment property exceeds the cost of owning the property when you take into account your loan repayments, interest and all other out of pocket expenses (like rates, water and maintenance costs). If you have a property that is positively geared, you will be enjoying a net gain from your investment. If you making an income from the investment it is cash flow positive.

Why Positive Gear?

Positive gearing is a good option if you are retired (as you will no longer have a taxable income to offset against the loss) or you don’t have a high taxable income. Positive gearing means you are making money on your investment property and you will also hopefully enjoy capital gains too. Beware however that property prices go up as well as down and interest rates may not stay this low forever so your costs could increase and the value of your property could decrease. Consider also the cost of having your cash tied up in the form of a deposit.

Property is not a liquid asset (you are not able to buy and sell it quickly) and is therefore a longer-term investment. Are you getting a better return on your money than you would on a term deposit? Depreciation Calculator

My Advice

Buy good quality investments, preferably with a reliable and rising income stream. Borrow conservatively so you can survive interest rate rises and possible loss of income. Maintain reliable income from your job or other sources to cover your borrowing costs, especially in the early years and make sure you claim your depreciation costs to increase your return.

Washington Brown manages construction costs worth over $2 billion and completes 10,000 schedules annually. For a depreciation schedule quote CLICK HERE and follow the 3 simple steps or estimate your depreciation cost for Washington Brown’s online calculator