Are you thinking of investing in the Australian property market? If so, understanding key concepts such as negative and positive gearing can help you make wise decisions in relation to your property investment plans in the long run. So, let’s have a look at what these terms mean.
Understanding Negative Gearing
Gearing means borrowing to invest. In terms of negative gearing, the investor has to put some surplus cash into supporting the investment. That happens because your rental income from the investment property is less than the expenses of holding that property.
These expenses normally include your loan repayments, which includes the interest expenses on that loan. It can also include other rental property costs such as agent fees, rates, insurance, maintenance costs etc.
If the property expenses which include interest costs and depreciation is greater than the rental income, your investment property is considered to be negatively geared. In short, a negatively geared property will require you to contribute additional funds from your back pocket each year.
Understanding Positive Gearing
Contrary to negative gearing, positive gearing adds to your annual income, which means the net return from your investment surpasses its expenses. Hence, you do not need to contribute additionally to holding costs or loan repayments.
Which Investment Option Should You Choose?
Focusing on your investment strategy is crucial. You might wonder why you would invest in a property that is negatively geared but choosing between negatively and positively geared investment properties solely depends on your long-term goals.
If you’re hoping to earn extra income from your investment property each year, then you may be best placed to look at positive gearing. Although finding a positively-geared property that still has good growth potential can be challenging.
On the other hand, negative gearing can help to minimise your taxable income and may have more growth potential long term. For this reason, negative gearing is traditionally favoured by individuals who don’t need extra annual income but would like to see the value of their investment property increase long-term.
What Should You Consider Next?
Before moving forward with any type of investment, it’s important to do your research. We recommend reviewing your financial capacity to ensure that you could service an investment property throughout changing market conditions.
It’s also worthwhile thinking about those unexpected costs relating to having an investment property, such as a sudden surge in Body Corporate contributions if you’re looking at an apartment or townhouse. Other costs like land taxes and landlord insurance cannot be passed onto tenants and need to be factored into your calculations.
The good news is that we are able to support you throughout the process of securing an investment property. There are many pitfalls that can be avoided with proper advice.
Contact Glance Consultants today to get the right advice and help with your business on 03 98859793 or at enquiries@glanceconsultants.
