Negative gearing - it may seem like investor mumbo jumbo, but it's really quiet a simple concept to get your head around. More than that, it's an important option in an investor's toolkit when looking for a property to invest in. Gear yourself up for a lesson in the basics of this investment system!
What is negative gearing?
In the investment world, 'gearing' is just another way of saying borrowing money to buy an asset - in the case of property investment, taking out a loan from a financial institution. Negative gearing is the case in which the interest you repay on your loan is higher than the income you generate from the property.
Here's an example:
· You purchase an apartment for $500,000.
· The bank loans you $400,000 with a 5 per cent interest rate.
· This means you have to repay $20,000 per annum.
· If you rent this apartment for $400 per week, this gives you a yearly income of $19,200.
· Which means you'll be $800 short every year - and this doesn't factor in other expenses such as maintenance and repair costs, insurance and council rates.
What are the positives of negative gearing?
If this grinds your gears, don't worry! There are several positives for investors:
More choice, more properties
With negative gearing, it becomes easier for anyone to invest in property. The market for neutral or positively geared properties is very small, so by implementing this system more people have a chance of owning property and seeing a long-term investment from capital growth.
The capital growth pay-off What's this? Simply, it's the growth in value of your property over time. Most properties get more valuable over time, so the profit you make from selling the property after a few years should offset the money you lost year-on-year with your negatively geared loan.
Reducing taxable income In order to help property investors, tax can be deducted from ongoing expenses, like interest on your loan and maintenance costs. These costs can be claimed against your annual income, meaning less will be taxed overall.
Want to know more? Negative gearing allows more people than ever before to invest in the property market - but any decision to purchase property and take up a mortgage should be done with the help of a professional. For more information about negative gearing or finding the ideal home loan, speak to our experienced team of mortgage brokers today.