If you’re looking to buy an investment property, you might have heard of the term “negative gearing”. It’s a popular investment strategy for Australians.
According to the latest available figures from the Australian Taxation Office, over 1.3 million Australian property investors use negative gearing as a strategy.
Read on to find out everything you need to know about negatively gearing an investment property.
What is negative gearing?
An investment property is negatively geared if all of the expenses associated with it are higher than the amount of rental income that it generates. Those expenses may include things like:
- interest on your investment property loan
- council rates
- body corporate fees if you buy a unit/apartment
- property manager fees if you hire a professional to manage your tenants
- the cost of advertising for tenants
- repairs and maintenance
- depreciation on the property’s fixtures, appliances and fittings. This expense is a non-cash expense, unlike the others. Depreciation is simply written off against your tenant income.
It’s important that you have the cash flow to make your repayments if you use negative gearing as a strategy. Your tenant income will help.
What are the benefits of negatively gearing an investment property?
There are two main benefits of negatively gearing an investment property:
- it can help you to increase your net worth.
This happens when the property increases in value over time.
It also happens over time as you make your loan repayments. The amount you owe on the property decreases.
2. it results in you paying less tax.
All of your investment property expenses can be deducted from your rental income on your tax return. This means you will pay less tax. The higher your marginal tax rate, the more tax you will save.
What is positive gearing?
Positive gearing is the opposite to negative gearing. It’s where your rental income exceeds your investment property expenses. Positive gearing delivers the same two benefits as negative gearing, but the tax benefit won’t be as high.
Where should you buy an investment property?
It’s important to choose an investment property in a good location. This will:
1) make it easier for you to attract higher quality tenants,
2) allow you to charge higher rent, and
3) give you a higher chance that your property will increase in value.
Good investment property locations tend to be close to schools, shops, entertainment facilities and where people work. They also tend to have good public transport options available.
How we can help
If you’re looking to buy an investment property, our experienced and licensed brokers at Wisebuy Investment Group can help you to find the right loan for your needs. We can also help you with your loan application.
We service a diverse range of clients in Newcastle, Lake Macquarie and Maitland, and we work with more than 60 lenders in the Australian market.