When you think of investing most peoples thoughts revolve around making money. However, with property there may be benefits to making a loss.
Sound confusing? Let us explain...
When you borrow money to invest it is referred to as ‘gearing.’ An investment is positively geared if the income it generates is greater than the costs to run the property (repayments, interest, maintenance, fees etc.) So in simple terms the property is paying for itself.
- More money in your pocket – The extra money you receive can be a handy extra income stream, especially if you have a few positively geared properties.
- Less risky – If you lose your job or your income situation changes then you won’t have to worry about supporting your investment property’s home loan.
- Tax time - As any profit you make from the property is classified as income it will be taxable.
- Changing market – The perfect environment for a positively geared property is when rents are high and interest rates low. However if one, or both, of these conditions change you may be faced with a loss – which may not be part of your strategy.
A property is deemed negatively geared when the expenses involved with the property are more than the rental income.
- It’s a tax deduction – any loss you incur may be offset against your taxable income.
- Lower rents = more tenant options – Lowering your rent to keep the property negatively geared may mean more clients will be interested and any current ones are less likely to look elsewhere, potentially saving you against the costs you would need to incur if your home was ever vacated.
- A loss is a loss – Although the loss is softened by a tax deduction you will still need to fork out the deficit in the meantime to cover the difference. This may be made a lot tougher if your financial situation changes.
- May hurt your borrowing capacity – Having a negatively geared property sucking away at your cash flow may make it difficult to grow your portfolio, as it decreases you limit of what you can afford.
It is important whenever you are considering purchasing an investment to make sure that you have a comprehensive understanding of your options, and personal situation. Therefore Resolve Finance recommends seeking the advice of a Tax Agent before taking the plunge into property investment. You can also find out more information on the ATO website.
As a property investor, there are many options available to you to devise the best investment strategy for your individual circumstances. If you'd like to find out more about about how property investing works and what the best options are for you, you can contact one of our Property Investment Specilaists here. We;d be more than happy to begin some preliminary discussions around what's possible for you.